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Urgent Stock Market Message

UK CPI Inflation Stuck at 3.1% Against Bank of England's Forecast for 1.6%

Economics / Inflation Sep 14, 2010 - 07:57 AM GMT

By: Nadeem_Walayat


Best Financial Markets Analysis ArticleUK inflation for August 2010 was unchanged at CPI 3.1%, remaining stubbornly above the Bank of England's upper limit of 3% and target of 2%, despite virtually 9 months of mantra from the Governor, Mervyn King that high inflation was ALWAYS just temporary and imminently expected to fall to below the 2% target. The more recognised RPI (real inflation) measure dipped marginally from 4.8% to 4.7% and which compares against average pay rises of 2% which illustrates the squeeze that ordinary people are experiencing especially as taxes rise and state services are cut. The academic economists that populate the mainstream press were again caught off guard as expectations were for CPI to fall to 2.8%, just as they have been caught off guard by high inflation EVERY month for the whole of 2010.

Recently the BoE Governor after 8 months of statements that UK Inflation would imminently fall (CPI forecast to have fallen to 1.6% by August 2010) has stated that he was surprised by the high level of UK inflation and now expects inflation to remain above the 2% target into the end of 2011 before falling to below 2%. In actual fact as my recent analysis illustrated (13 Aug 2010 - The Real Reason for Bank of England's Worthless CPI Inflation Forecasts ) that Mervyn King and the Bank of England are not actually making inflation forecasts but rather pumping out always imminently low inflation propaganda so as to prevent a wage price spiral from taking hold in which respect they have succeeded given the 2.7% gap between RPI inflation and average wage rises. Therefore all of the Banks statements and reports are for the sole purpose of TALKING INFLATION lower, and are thus pure propaganda to manage the psychological expectations of the the British Population so as to enable the BoE to better achieve its targets.

Mervyn King deployed another tactic in his recent letter to Alistair Darling which is to state that he and the BoE were surprised by the strength in inflation, because it is better for the BoE to be surprised by high inflation than to have forecast high inflation coming and then to have failed to have done anything to prevent high inflation from materialising.

At the end of the day inflation is a stealth tax that is being used by the Government and the Bank of England to a. Reduce the budget deficit (eroding purchasing power), and b. funneling tax payers and savers cash onto the balance sheets of the bailed out banks as savers are in receipt of interest net of tax at half the CPI rate and similarly average workers pay rise is near half the CPI and far below the RPI inflation measure of 4.7%.

The Bank of England and the mainstream press always focus on rear view mirror excuses as to why inflation is high such as this months excuse that it is as a consequence of the rise in food prices, however the point is that there ALWAYS is an excuse because if it was not one thing it would be another just as in the coming months different excuses will be put forward to explain why UK inflation remains stubbornly higher than expectations. However looking in the rear view mirror is a worthless exercise when it comes to savers trying to protect their wealth, as for instance the NS&I Index Linked Savings Certificates were withdrawn by the Coalition Government in June ahead of the BoE changing its mantra from highly temporary high inflation. The certificates amounted to a 100% safe inflation hedge that pay an effective tax free interest rate of 6% against the bailed out bankrupt banks that pay less than 2% taxable interest and that everyday continue to cut the rates. Similarly wage earnings have been duped by the Government and the BoE to agree to pittance pay rises of less than 2% or even pay freezes whilst their actual personal inflation measure soars well above the official measures of CPI and RPI.

UK Inflation Forecast 2010

UK CPI Inflation at 3.1% for August 2010 is EXACTLY in line with my trend forecast for 2010 as of December 2009 that projected CPI above 3% inflation for most of 2010 and specifically CPI inflation of 3.1% for August 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%) and the Inflation Mega-trend Ebook of January 2010 (FREE DOWNLOAD) as illustrated by the below graph.

UK Inflation August 2010

Bank of England's Worthless Inflation Forecasts

According to the Bank of England's forecast for UK inflation as of Feb 2010, CPI inflation by August should have fallen to about 1.6%, instead it is at 3.1% (see graph), with the forecast for inflation to fall to below 1% by the end of 2010 and magically always converge towards 2% in 2 years time which fails to occur 96% of the time.

The Bank of England relies on the gold fish memory of the mainstream press as the BoE seeks to revise inflation forecasts every quarter to push forward 2% to two years forward, which is nearly always preceded by a trend to below 2% one year forward. But as mentioned above the quarterly inflation reports are just propaganda aimed at psychologically managing the populations expectations on the economy and inflation in the direction where the BoE wants it to be as the alternative would be to make the BoE's job harder.

More here - The Real Reason for Bank of England's Worthless CPI Inflation Forecasts

The big question is when will UK interest rates rise in the face of persistently high inflation which my next in depth analysis will seek to answer, ensure you are subscribed to my ALWAYS FREE Newsletter to receive this in your email in box.

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By Nadeem Walayat

Copyright © 2005-10 (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 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.

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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