UK inflation a ‘temporary’ blip? Pull the other one, Mervyn

• This article was updated on 15 November 2011.

UK inflation indicator: the ‘core’ Producer Prices Index (PPI)

Our cost of living is climbing fast. CPI (the consumer price index) is rising at 5% a year. That compares with the official 2% target.

But the Bank of England reckons that Britain’s cost of living “is likely to fall back sharply next year as the influence of the factors temporarily raising inflation diminishes”.

In other words, it thinks fast-rising costs like food and fuel should stop pushing overall prices up so much. That’s part of its justification for printing more money.

So we should only really worry about ‘core’ inflation, which strips out these nasty volatile bits. And core inflation isn’t a problem… or is it?

Here’s a rather concerning chart. It shows UK inflation – the annual change in CPI – in red. But look at the purple line.  

UK inflation indicator: Core producer prices index (PPI)

Source: Bloomberg

It’s the annual increase in the ‘core’ Producer Price Index (PPI). This measures so-called ‘factory gate’ prices, ie what Britain’s manufacturers are charging customers for their goods. But it strips out those volatile food and fuel items. 

The bad news for UK inflation is that core PPI is accelerating faster than CPI. Over the last decade, the annual change in CPI has risen from 1.2% to 5.0%. But during that time core PPI has climbed from -0.72% to 3.4% a year. And this trend shows no sign of stopping.

As these upward PPI pressures are passed on to consumers, our overall cost of living is likely to rise more quickly too. That’s even if fuel and foods costs actually do drop a bit – which is a very big ‘if’, anyway.

We’ve just written in Money Morning about how the latest dose of quantitative easing (QE) from the Bank of England could drive our inflation rate higher. Today’s PPI numbers are warning the problem could get even worse. And as we explain in Money Morning, that would be bad news for the economy, and the stock market as well.

Go back the UK inflation indicators main page

  • Boris MacDonut

    No David. Mervyn is right.That is why he is at the BoE and you are scraping a living as an investment pundit. Infaltion is a temporary blip.

  • PD

    It is Mervyn’s job to do that. State the bleeding obvious and then keep making some vague prediction at the end that the inflation will drop below target.

    “I know inflation is at 25% and has been for the last 10 years but it will drop down below target in the medium term.”

    Now for some tea and biscuits.

  • Roberto Birquet

    Yes, Boris. Mervyn has been a marvel at the BoE, hasn’t he? At the head of the body that set interest rates, keeping them low while a credit and asset bubble was blowing up, and when it was too late to stop the bubble, managed to raise rates just when Armageddon was coming and we needed to prepare for it with lower rates. An absolute legend. We should give him a knighthood.

    What? This govt has? They are bleeding marvels, too! King must love this govt. Instead of doling out blame to all who needed it: The Bank for rate setting that encouraged a bubble, then missed the coming crash; a bankrupt economic model and profession; the last govt for assuming economists knew what the Hell they were talking about, and spending too much on that assumption, the bankers for taking the almighty proverbial Mick. It does not blame him at all and gives him a Sir-dom. “Wow, can’t believe my luck.”

  • Jay

    Lets be honest and use common sense the uk debt is just as bad as Greece and the bankers can see this.
    RBS is at 23p per share and the UK govt (us as tax payers) are going to buy more shares at 50p. Umm ask why?
    All the banks with Basel banking policy and the need for cash a QE of £75 bn was going to happen even another £75 bn is on the cards.
    Inflation and stagflation is what Merv wants as this reduces all the UK PLC and thus govt debt.
    Inflation kills debt over time and thus more higher inflation the shorter the time is.
    Inflation was used in the USA and after both the first world war and second so get ready for a Depression and stagflation.
    The MPC has never understood the time delay effect from the monthly meetings to base rate changes,but keeping base at 0.5% will do nothing we are between a rock and a hard place with a storm on its way and low on fuel.

  • DavePage
  • TomJefs

    Ah Merryn, another one of the out-and-out austerians who supports pushing us off the cliff. Qe2 is right to do. Reading where we are deflation is the bigger threat and has been for years (just look at the ECB). Paul Krugman, one of the few economists who actually explains the key economic data, is proving more right as time goes on.

    I recommend people read his blog and The Economist’s Buttonwood blog to have a more realistic understanding of what’s going on rather than the callow prejudices at MW.

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