Rip-off Britain on the line

March 13, 2013

For all the talk about imported inflation in the UK as policymakers talk down the pound and financial markets merrily give it a good beating, here’s a stark reminder that a lot of British inflation remains home-grown.

British inflation has been so sticky over the past decade that regular Bank of England pronouncements that it will come back down from wherever it is to the 2 percent target at the 2-year horizon has become something of a policy piñata in financial markets. And there is rampant speculation the government will soon modify that inflation target.

But it’s no joke to British consumers, whose wages have stagnated for years and with a plunging currency in their pocket that is down more than 8 percent so far this year. They’ve been much more frugal with their spending, and as a result the economy is on its back.

Alan Clarke, UK economist at Scotiabank, drew up this simple chart, which shows UK consumer price inflation in the communications and transport sector along with the equivalent measure across the English channel in France. The blue line is Britain, the red line is France.

You get the idea: these lines should be roughly similar. It’s only a narrow body of water between them. The two countries are so close that Britons living on the seaside in Kent, just 20 miles away from Calais, have been hit by roaming charges while their carrier thought they had skipped off to France.

Clarke writes:

In the UK, mobile phone companies are whacking up pay-monthly tariffs (even if people have signed up to a 1-2 year deal) because of rising costs – because they can.

In France, the new mobile phone provider Free has caused massive discounting. French communications prices are falling by around 15% y/y and UK prices are up by 3.5% y/y.

The fall in French communications prices was a major reason for yet another surprise fall in French inflation in February. The sector is subtracting around ½% from headline French inflation.

Clarke notes that British Prime Minister David Cameron, who said he was happy to roll out the red carpet to anyone wanting to avoid high income taxes in France, “should not only roll out the red carpet – he should pay the Eurostar tickets for the management of Free to come over here.”

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