15 Feb 2011

Britain ‘the sick man of Europe’

A blizzard of misery this morning from the Office for National Statistics. Even before the inflation numbers were unveiled, Britain was confirmed as the sick man of Europe.

German and French GDP in Q4 released today UP 0.4 per cent and 0.3 per ceny respectively. That includes a snow effect. Britain’s figure was minus 0.5 per cent in the same period. Even Italy outperformed the UK in Q4, managing to grow, though only just, by 0.1 per cent.

And then on my way to Bracknell with a scandalously  inflationary train ticket in one hand and a copy of “When Money Dies” by Adam Fergusson in the other, the inflation numbers dropped on to my iPhone.

CPI inflation at 4 per cent is double the target set by the Chancellor for the Bank of England. Yes, it could have been worse, but inflation has been well above target for most of the past five years.

 Small wonder there are signs of rising inflation expectations, and that is what I am investigating in Bracknell. Stagflation-light feels like a heavy burden.

The breakdown of the figures shows utterly huge year-on-year price increases in “liquid fuels” heating oil (21.2 per cent) and transport insurance (29 per cent), although that happened mostly in late 2010.

There is a massive 11 per cent increase in rail fares, as you heard first on C4N, the product of a Governmental choice. Oils, and soft drinks were also up around 10 per cent year on year.

So this 4 per cent CPI inflation, driven by the surge in transport, food and booze, outweighs the fact that clothes price rises had been kept down by retailers.

Clearly the rise in VAT is a major factor. But CPIY, which strips out VAT and other taxes, was also elevated at 2.4 per cent, and RPIY at 3.8 per cent.

The old measure of inflation, RPI – still used widely in Britain – reached a whopping 5.1 per cent, painful for those with pay freezes.

In Mervyn King’s letter to the Chancellor, he says that without three exceptional factors (VAT, the impact of a weaker pound, the rise in commodity prices) then CPI would “probably have increased at a rate well below the 2 per cent inflation target”.

He then goes on to say that he “can’t conceal real differences” on the nine-member MPC that votes on interest rates.

The issue for the MPC is that whatever the exceptional factors beyond the Bank of England’s control, the inflation felt in households across the country is very real.

The Bank will not want to push this beyond the point that the inflation target loses its vital role as an anchor for inflationary expectations.

It is a vicious dilemma. I expect them to make an exploratory “toe-in-the-water” rate rise in the next four or five months.