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5 "Tells" that the Stock Markets Are About to Reverse

UK RPI Deflation -0.4%, CPI Inflation 2.9%

Economics / Inflation Apr 21, 2009 - 10:16 PM GMT

By: Nadeem_Walayat

Economics

Best Financial Markets Analysis ArticleUK RPI Inflation data of minus 0.4% for March represents real deflation in the official data. Whilst the Governments preferred inflation measure CPI recorded a smaller decline to 2.9% which still puts it well above the Bank of England's target rate of 2%. RPI deflation is not so surprising given the panic interest rate cuts from 5% at the beginning of October 2008 to just 0.5% by the last cut of March 2009, these cuts in interest rates coupled with quantitative easing aka "money printing" to drive down long-term interest rates and hence mortgage rates is resulting in real deflation for those with large mortgages of as much as minus 5%, therefore is providing for mini 'temporary' cash flow boom for those mortgage holders that have secure employment during the recession.


However this needs to be set against the bursting of the asset bubble that has for instance seen house prices fall by 21% from the peak of August 2007. UK deflation in the face of the bursting of the asset bubble is expected to come to an end during late summer 2009 with signs that the preferred measure of CPI is already warning of fast gathering inflationary clouds as the gap between RPI and CPI Inflation continues to widen.

The trend in inflation data is inline with my original forecast as of Dec 08 that saw deflation going into mid 2009, followed by a rising inflationary trend during the second half of 2009. The key reason for which will be the ongoing sterling bear market which continues to push up prices in the shops as retailers restock as warned of during mid December 2008.

UK Inflation Forecast 2009

UK Interest Rates

UK interest rates were held at 0.5% as expected and reflect THE BOTTOM in UK interest rates as a further cut to 0.25% would make NO DIFFERENCE to economy, but instead hit sterling and send out mixed messages to the financial markets. Therefore the only question now is WHEN will UK interest rates start to rise again, my original forecast as of 4th of Dec 08 is for UK rates to start rising during the second half of 2009 as the economy begins to stabilise from free fall following the governments borrowing and spending binge.

UK Recession

The economy is on track towards starting to recover by the end of 2009 from the worst recession since the Great Depression that is forecast to see GDP contraction of -6.3% as per the original forecast as of mid Feb 09. However as I have warned several times, that the growing debt mountain could trigger a double dip recession AFTER the next election as public spending cuts and tax rises are undertaken by the next government in an attempt to bring government debt under control. This therefore implies that we have not seen the end of Quantitative Easing as like a drug, it will be difficult to wean the economy off of it, therefore my expectation is that the government will force the Bank of England to accelerate Quantitative Easing far beyond the £75 billion announced to date.

Meanwhile the mainstream forecasters including the Treasury continue to play catchup by constantly revising debt levels higher whilst revising economic growth lower. For instance the Governments forecast remains for GDP contraction of 1% this year, this is against my forecast for contraction this year of nearly 4%. Similarly in recent weeks the consensus has gradually drifted towards a contraction of 3% this year.

UK Debt and Liabilities

Quantitative Easing, exploding public sector debt and liabilities with the petrol of bankrupt banking sector liabilities that look set to reach £2 trillion thrown on top of the countries balance sheet, all paint a bleak picture for the UK economy for many years if not decades. The inevitable outcome of which will be for the devaluation of the purchasing power of the currency which means higher inflation, and therefore suggestive of a stagflationary economic environment for many years.

Record low interest rates, huge amounts of deficit spending, and quantitative easing has the effect of punishing prudent savers whilst rewarding reckless borrowers so as to improve the Labour Governments chances of winning the next election, the price of which will be paid for AFTER the next election as taxes rise and public spending is cut to narrow the huge budget deficit that is presently running at an unsustainable £160+ billion a year and strongly suggesting a stagflationary economic environment to follow the end of economic contraction.

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By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

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 the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 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

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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