- Sumeet Desai, Reuters senior UK economics correspondent. -

Inflation unexpectedly held steady in July, official data showed Tuesday, but economists still expect big falls in the annual rate this year and monetary policy to stay loose for some time to come.

Is a 1.8 percent inflation rate good or bad news?

-- David Kuo is a director at the financial Web site The Motley Fool. The views expressed are his own. --

What are consumers supposed to make of the latest inflation numbers? Do we have inflation, deflation or a bit of stagflation?

Truth is, it depends on who you are and what you do with your money. The Retail Prices Index or RPI tells us that prices today are exactly the same as they were a year ago. The Office for National Statistics reported that RPI was unchanged at 0%.

But be very careful when bandying around the term “prices”. The RPI includes elements of housing costs. So it is better to talk about the cost of living rather than prices. Prices have risen compared to a year ago, but the total cost of living as measured by RPI has fallen because of the disproportionately large drop in mortgage costs as a result of lower interest rates.

The proof, if proof was needed, that prices have risen from a year ago, can be seen from the Consumer Prices Index (CPI). Instead of 0%, as measured by the RPI, prices as measured by the CPI are 3.2% higher. The CPI does not include housing costs, so it is a better measure for people on fixed-rate mortgage deals, and also for people in rented accommodation.

The upshot is that if you have taken on mortgage debt and chosen to spend rather than save, then you are worse off as a result.

However, it’s worth bearing in mind that both the RPI and CPI are broad measures of inflation. Consequently, the extremely large basket that is used to gauge inflation may not necessarily reflect the true changes in the cost of living that you may experience. Put another way, if we don’t buy exactly the same things that the ONS puts into its basket then we will experience a different rate of inflation.

To measure our personal inflation rates we need to compare our household budgets today with what we spent a year ago. Interestingly, a twice-yearly study by The Motley Fool has shown that personal inflation is consistently higher than the Government’s measure of inflation.

This should set alarm bells ringing for many of us.  If inflation refuses to die in a so-called deflationary economy, then the outlook for the cost of living could worsen when the Government finishes pouring money through quantitative easing or the printing of raw money.

The jury is still out as to whether quantitative easing will work. It is almost anyone's guess. But history tells us that boosting the supply of money can be inflationary. This is because when there is too much money sloshing around an economy, chasing a limited supply of goods,  prices will inevitably rise.

Investors therefore have two clear choices. They can sit on their hand and hope that their nest eggs will not shrink to the size of quails’ eggs through inflation or they can heed the lessons of history and invest in assets that have demonstrated an ability to combat inflation.

Only two asset classes have successfully beaten inflation in the long term. These have been property and shares. Most homeowners already have a large exposure to property. So, it may be prudent to increase their exposure to shares to rebalance their way their wealth is distributed.

Interestingly, the yield on UK shares is currently around 5%. That is almost ten times more than interest earned in a traditional savings account. Of course your capital is exposed to both ups and downs.

Even better yields may be available from individual shares. But it is vital to choose carefully. After all, dividend payouts are at the discretion of the company's directors. That said, companies are often reluctant to cut dividends unless they absolutely have to. And a careful selection of companies whose dividend payouts are strong could be just the panacea for embattled investors.

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Net job creation in the UK has almost stopped as employers feel pessimistic about prospects for the economy, the latest quarterly Labour Market Outlook survey by KPMG and the Chartered Institute of Personnel and Development (CIPD) has found.

The balance between the proportion of employers looking to increase staff levels over the next three months and those expecting to cut has fallen from +41 in autumn 2007 to +2 in autumn 2008 – the lowest figure recorded since the survey began in spring 2004, according to the Payroll and Human Resources Newsletter.

Of the 721 employers surveyed, 83 per cent anticipated that Britain’s economic condition would further deteriorate this autumn and only one percent said they thought there would be an improvement.Respondents felt more optimistic about their own organisation though, with only 25 per cent believing that things would get worse.

Even though inflation is running at a 16-year high of 5.2 percent, staff pay excluding bonuses is seen increasing on average by just 3.5 per cent when the next pay review is due, while the expected average increase including bonuses has risen from 3.9 per cent to 4 per cent.

With official UK unemployment data for October due out on Wednesday, CIPD Chief Economist John Philpott sees a gloomy winter ahead:  “With pay increases at best modest for those still in work, the harsh chill of recession will make this the toughest winter for UK households for almost two decades.”

Tell us what impact the downturn has had on you and your business. How has staff morale been affected?

Bank of England policymakers have held rates steady at 5 percent for a fifth month running.

Inflation currently stands at more than double the central bank’s 2 percent target but any rise in rates to try to choke that off risks aggravating the overall economic slowdown caused by the credit crunch.

Firmly impaled on the horns of a dilemma, most of the the nine-member Monetary Policy Committee, including Bank Governor Mervyn King, thought no change was the best option, given the risks.

What would you have done?

Credit crunch, surging food prices, rising unemployment, house prices tumbling, maybe even a recession …. isn’t it all enough to make you feel miserable? And I’m not even mentioning the dismal British summer weather.

And all that desolation can be measured - the Misery Index is a financial pain barometer measured by adding the rate of inflation to the unemployment level.

Financial Web site Money Morning points out in a note that it now stands at a 12-year-high of 9.8 percent in Britain (consumer price inflation of 4.4 percent plus unemployment rate of 5.4 percent).

Not the most scientific approach but the index’s founder, American economist Arthur Okun, based it on the assumption that a higher rate of unemployment and a worsening of inflation both create economic and social costs for a country. Some analysts also argue that the rate of crime and the misery index correlate strongly.

During the Presidential campaign of 1976, Democratic candidate Jimmy Carter made frequent references to the Misery Index, which by the summer of 1976 was at 13.57 percent. Carter stated that no man responsible for giving a country a misery index that high, had a right to even ask to be President. The remark may have haunted him somewhat as four years later it had soared to 22 percent and Ronald Reagan won the election.

While 22 percent sounds high, spare a thought for the British consumer. Money Morning points out that in the summer of 1974, the UK Misery Index climbed well into the 30s, as annual inflation topped 26 percent and the country was hit by the three-day week. Then after a hitting a low of 13 percent by mid-1978, the index took off again after the “Winter of Discontent”, reaching 26 in the early months of Margaret Thatcher’s reign as Prime Minister.

More gloom and doom to come - is it all getting too much? You could try and listen to Baltimore-based death metal band “Misery Index” with its anti-consumerist lyrics or buy one of their T-shirts stating that “Ignorance is Bliss”.

Battling with the twin evils of soaring inflation and weaker growth, the Bank of England has kept interest rates at 5 percent for the fourth month running.

With the risk of Britain possibly facing its first recession since the early 1990s, the MPC has clearly opted for caution.

But aren’t the prices of oil and other commodities starting to fall? Isn’t the greater risk towards sluggish growth?

Do you think the Bank is being too cautious and should have gone for a cut?

Exactly one year since the credit crunch started retail sales have shown their biggest fall on record in Britain, news that is likely to spur recession talk among consumers, who are already feeling the pinch from rising fuel and food costs.

For sure, the 3.9 percent drop in June was much worse than expected - economists had forecast a 2.5 percent decline - but shop prices are still higher than a year ago and the retail sales data series is notoriously volatile.

That might be enough to maintain interest rates on hold for now. The hawks among the Bank of England policymakers will find reason to remain cautious, no matter whether commentators are fretting that a combination of rising commodity prices, slowing house prices and falling consumer spending may push Britain into recession later this year or in 2009.

Recent minutes from the monthly meeting showed policymakers remain divided over the future path of interest rates as their opinions were split over whether the main threat to the economy comes from the slowdown in spending or from the spectre of rising inflation.

“Overall it underlines the picture of slowing growth and rising price pressures,” HBOS economist Mark Miller said. Vicky Redwood, from Capital Economics, predicted: “We think that spending growth will weaken considerably further, as house prices keep falling and inflation and unemployment rise further.”

More insight will be gleaned from Friday’s second-quarter estimate of economic growth, followed by the Bank of England’s survey of consumer credit and mortgage approvals for June on Tuesday.

(updated with new photo)

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Hundreds of thousands of council workers are striking over pay in the biggest bout of industrial unrest in years.

Members of Unite and Unison are protesting over deals to increase their pay by 2.45 per cent, which is below the rate of inflation and which they say means an effective pay cut.

How are you affected by the strike? Is the council workers’ action justified?

Gordon Brown is asking us to stop wasting so much food and suggests that if we threw less away, demand would fall and then so too would food prices.

He says we’re throwing away around eight pounds worth of food a week, adding something like 420 pounds to the average family’s shopping bill.

But agricultural prices have increased some 40 percent over the past year and oil prices have doubled — is it really going to make much difference if we start paying less attention to sell-by dates?

By common consent, Gordon Brown’s first year is ending up as a shocker for Labour.

It may have started well last June with assured handling of a bomb threat and a swift response to the foot and mouth outbreak last August. Pledges to cut back on two largely unpopular measures: Tony Blair’s plans to open “super casinos “and the extension of drinking hours, also struck a chord with voters.

But since the infamous “bottled election” last Autumn, nothing seems to have gone right for the man who waited so long for the top job. The opinion polls are full of doom and Westminster insiders say talk of finding a successor before the expected 2010 election is rife.

Brown’s supporters say it is unfair to blame him for world trends outside his control — it was the credit crunch that began in the U.S. that caused the Northern Rock collapse and what is the British prime minister supposed to do about sky-high world crude prices that are driving up inflation?

What is your verdict on Brown’s first year?