MacroScope

Rip-off Britain in effect

July 13, 2010

While most of the developed world frets about deflation, in Britain, inflation just won’t quit. 

The Bank of England has been forecasting a sharp fall in consumer price inflation for about as long as Britons have hoped for a summer of uninterrupted sunshine. But at least Britons are still betting on a fair amount of rain. 

UK inflation was 3.2 percent in June, a slight fall from the month before, but still 1.2 percentage points above the central bank’s target rate

 “Another big shocker,” said one economist. “Yet another depressing month,” said another. 

No wonder Londoners roll their eyes when on the one hand policymakers say inflation’s set to fall and on the other, they’re told that tube, bus and transport fares are set to rise sharply again next year – as they do every year.

BRITAIN-ELGAR/In 2003, when I moved to London, a cash bus fare was 70p. Now it’s £2. We’ve just been through the worst post-War recession on record but inflation lingers on.

Core UK inflation, which some say is a better underlying measure of price trends even though the BoE targets the headline rate, rose back to 3.1 percent, the same as in April, and the highest since current records began in 1997.

By comparison, in the United States, core inflation was just 0.9 percent at the last measure, well below the U.S. Federal Reserve’s comfort zone. Forecasters don’t expect it to have budged from there in June.

Headline inflation is just 1.6 percent in the euro area, half the UK’s rate.

Forget the economic models. Forget the technicalities behind this month’s numbers. Forget the impending fiscal squeeze as governments take a machete to department budgets. Forget the fact interest rates are at near zero and the central bank has just pumped the financial system with 200 billion pounds of money that didn’t exist.

When will British inflation really fall and will it take another economic disaster?

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