Wednesday, 14 July 2010

RPI, CPI And Unemployment

Yesterday saw the announcmeent of latest inflation figures.

All of the TV headlines were about the fact that CPI fell to 3.2%. That is still more than 50% higher than the Bank of Englands 2% target. There was little about the more worrying aspects of inflation that lie behind this figure. Firstly, the figure was worse than expected. Economists epected it to fall to 3.1% Secondly, the other measure of inflation, the Retail Prices Index or RPI, which includes things that people have to spend money on such as housing only dropped from 5.1% to 5%. More worrying still, is the data you have to dig deeper for. The BBC website says,

"More worryingly, core inflation - which ignores volatile energy and food prices - rose from 2.9% to 3.1%, equalling its highest level since records began in 1997.

The accelerating core inflation suggests that the longer term trend direction of inflation may in fact still be upwards.

A major factor behind this was the rising cost of services, which accelerated to 3.9% from 3.4% in May."

The graph of inflation on the various measures shows the problem for the bank and for the Government.

RPI is rising at a very fast rate, shown by the steepness of the curve. There is much more in the pipeline as I have set out in previous blogs. At the same time, wages are failing to rise anywhere near as fast as Stephanie Flanders sets out in her BBC Blog Stephanomics

Already, one member of the Bank of England's Monetary policy Committee, Andrew Sentance, is calling for higher interest rates to stave off the inflation down the road. he's in a minority of one, and will stay that way, because as I've said in the past the majority of the work in actually cutting the deficit will be done by the State allowing inflation to rip.

Meanwhile today, figures showed that not only did unemployment fall in the first three months of the year by a significant amount Unemployment falls but 160,000 more people were in work. Yet again, it is an indication that the counter-cyclical stimulus was working. That means that the Liberal-Tories will have to shoulder even more of the blame as unemployment begins to rise again later in the year as a result of their policies. More evidence that this will be an inevitable result came from the evidence given by Alan Budd to the Treasury Select Committee.

Budd is in charge of the Office for Budget Responsibility set up by the Liberal-Tories. It is supposed to be indpendent but Budd was advising the Tories prior to the election. It is situated in the Treasury just down from Osborne's office, and is staffed by Treasury officials. No questions about its independence there then! In the Budget Debate, Cameron used OBR figures, that were so hot off the press that many thought they had been produced for the purpose, to argue that their would be lower unemployment at the end of the Parliament, and that the job losses in the private sector would be less than would have resulted from Labour's planned cuts. Yesterday, Budd said that these figures were misleading. In fact, their original figures showed Public Sector jobs lost being around 750,000 not the 600,000 cited by Cameron. But, Budd said that their report included a lot of provisos to arrive at the figures for growth, and unemployment - provisos which most economists beleive are unachievable, for example large scale export growth - and these needed to be taken into account. But, as Alistair darling said on yesterday's "Daily Politics", it is inconceivable that Cameron's advisers would not have pointed all of those provisos out to him, or drawn his attention to the range of outcomes possible in the OBR analysis. yet, he made no reference to them in his speech in front of the Commons. It appears to be a repetition of the kind of use of supposedly independent reports that Blair used with the "Dogy Dossier".

On top of that, there have been reports in the last couple of days that 50% of the mortgages handed out in the beginning of this year have been so called "liar loans" that is loans given to people without them having to prove their income - presumably because lenders knew that if they were asked to, they couldn't show they had enough income to pay the mortgage. That was the kind of practice that led to the Sub-Prime debacle. With jobs in the Public and private sector starting to go up in smoke, with wages being squeezed and inflation starting to rise rapidly, with the number of people in arrears on their mortgages at record levels, and banks handing out dodgy loans, the scene is set for some serious problems. Even if interest rates do not go up to counteract inflation, then fewer jobs, and squeezed incomes means that a housing crash is inevitable. Housing crashes do not cause recessions, it is always the other way round, but a double-dip recession or even a slow-down could provoke that crash, which will then feed back into deepening that crisis.

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