UK Inflation Hits New High of CPI 3.7%, RPI 5.3%, Mervyn King Writes Another Excuses Letter
Economics / Inflation May 18, 2010 - 04:14 AM GMTBy: Nadeem_Walayat
UK Inflation has yet again hit a new high of CPI 3.7% up from last months inflation peak of 3.4%, with RPI rocketing even higher to an eye watering 5.3%, a level not seen since 1991. The academic economists were again taken by surprise. The Bank of England's failure in its primary duty of targeting inflation has prompted the Governor Mervyn King to write another letter to this time the new Chancellor George Osbourne that will again state for the fifth time this year that the rise in inflation above 3% was temporary and not to worry, it should come down, eventually (fingers crossed).
However, the real rate of UK inflation as measured by the publically more recognised RPI index has rocketed higher to 5.3% from 4.4% and stripping out the effects of manipulated low interest rates as a consequence of Quantitative Easing and other direct interventions such as the funneling of tax payer cash onto bailed out banks balance sheets leaves the RPIX at 5.4% up from 4.8% which better reflects actual UK consumer price inflation experience and is inline with my own real inflation tracker that stands at 6.5%
UK Inflation Forecast 2010
My analysis since November has been warning of a spike in UK inflation as part of an anticipated inflation mega-trend (18 Nov 2009 - Deflationists Are WRONG, Prepare for the INFLATION Mega-Trend ) that culminated in the forecast of 27th December 2009 (UK CPI Inflation Forecast 2010, Imminent and Sustained Spike Above 3%) as illustrated by the below graph.
Inflation Is a Government Stealth Tax On / Theft From Savers and Workers
Whilst Mervyn King writes another letter full of repetitive worthless excuses as to why the Bank of England cannot do its job. The price is being paid for by ordinary savers and workers who are in effect being robbed by the banks and the government as inflation is a stealth tax on savers and earners that seeks to stealthily destroy the real value of accumulated life time savings and erode the real purchasing power of earnings.
Add to this that savings are TAXED at 20% then savers should be enraged and demonstrating in the streets as to why they are receiving a pittance of interest rates at just 2.5% on even the top ranked savings accounts when inflation as measured by RPI is at 5.3%, and when tax is taken into account savings interest rates would need to be at 6.4% JUST to break even against inflation. So basically the Government, Bank of England in collusion with the bankster's are STEALING more than 50% of the earnings capacity of savings and therefore theft of the real capital value.
Inflation Protection for Ordinary Savers
With RPI at 5.3% the only real effective protection that ordinary savers can seek is in National Savings Index Linked Certificates which pay RPI +1% TAX FREE as mentioned in the Inflation Mega-trend Ebook (Free Download). However protection here is limited to a maximum of £15k per issue per individual.
VAT 20% Inflation Time Bomb
Temporary Inflation ? Will Inflation still be temporary when it soars above 4% CPI and 6% RPI as a consequence of the VAT hike to be announced in the ConDem emergency budget on 22nd of June, as I wrote recently (05 May 2010 - Greece Economic Depression Resulting in INFLATION NOT DEFLATION Surge )
A post UK election VAT hike to 20% from 17.5% is near certain to bring in extra revenue of about £13 billion per year. This will have the effect of both spiking inflation sharply higher and maintaining the ongoing longer-term inflationary mega-trend, therefore I would not be surprised that following the implementation of a VAT tax hike that CPI spikes above 4% and RPI as high as 6%! Which would further discredit the Bank of England's mantra of "Don't Worry Folks its Only Temporary".
Sterling's Inflationary Slump Continues
Sterling at £/$1.44 remains firmly on track to achieve its forecast sub £/$1.40 low (26 Dec 2009 - British Pound GBP Forecast 2010 Targets Drop to Below £/$1.40) now probably within the next 2 weeks, the specific support target lies at £/$ 1.37. The continuing slump is highly inflationary as it forces up the price of imports.
1. That sterling is targeting immediate support at £/$1.57 which implies it may temporarily bounce from there back through £/$1.60 before the eventual break.
2. That a break below £/$1.57 would target a trend to below £/$1.40. On a longer term view, the chart is indicative of trading range between £/$1.57 and £/$1.37, on anticipation of the eventual break of £/$1.57. On average this implies a 10% sterling deprecation against the trend of the preceding 6 months or so.
Interest Rate Rise Around the Corner
The base rate is at 0.5%, whilst CPI is at 3.7%, the base rate should be at least 4.5%. This is as a direct consequence of bailing out the banking sector where money is being effectively stolen from savers and dumped onto the balance sheets of banks, who then recycle it out as bonuses for fictitious profits that only exist because of the forced tax payer and savers bailout.
The Bank of England and the mainstream press continues with the mantra of NO change in UK interest rates this year, this is illustrated by Roger Bootle of the Daily Telegraph's repetitive assertions that he expects UK interest rates to stay below 1% for the next 5 years! Meanwhile market interest rates have already risen as the bond markets price in higher inflation and interest rates, with the bond market targeting a year end interest rate of between 4.5% and 5% for UK government bonds which will have severe implications for the financing of Britians huge and growing £1 trillion debt mountain (PSND) with total liabilities extending to more than £3.7 trillion.
My in depth analysis of 13th January (UK Interest Rate Forecast 2010 and 2011 ) concluded with the following forecast, that takes into account that despite the Bank of England wanting to keep interest rates at 0.5%, the market as a consequence of inflation and debt will force the Bank of England to start raising rates as we have witnessed amongst the Eurozone PIGS.
UK Interest Rates Forecast 2010-11: UK interest Rates to Start Rising From Mid 2010 and Continue into end of 2010 to Target 1.75% / 2%, Continue Higher into Mid 2011 to Target 3%.
The Inflation Mega-Trend
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Source: http://www.marketoracle.co.uk/Article19573.html
By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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