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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Zero UK CPI Inflation Rate Prompts Deflation Danger Propaganda For Fresh Money Printing

Economics / Inflation Mar 25, 2015 - 03:15 AM GMT

By: Nadeem_Walayat

Economics

Zero 0.0% CPI inflation not seen for 50 years as the continuation of the consequences of the collapse in crude oil prices that continue to stagnate below $50. And that despite falling unemployment wages are being suppressed as a continuing consequences of out of control immigration as workers continue to flood into the UK from across the economically depressed euro-zone. Whilst the mainstream press continues to warn of the dangers of outright deflation as CPI is expected to nudge below 0% and describe how this is bad for the economy as people put off consuming today in the anticipation of lower prices tomorrow. Meanwhile RPI, which is the closest thing to real inflation slid to 1% (1.1%) and is set against the real demand adjusted UK inflation rate of 1.5%.


However, firstly the average CPI inflation rate over the past 12 months is 1.2% and the average for the more recognised closer to reality RPI inflation rates 12 month average is 2.1%, so no, the UK does NOT face deflation dangers for the academics and journalists fail to realise the difference between good deflation and bad deflation. Good deflation is when prices fall as a result of lower material costs and increases in worker productivity as a consequence of the exponential trend in technological advancement i.e. the internet.

Whilst bad deflation is as a consequence of a contraction in economic activity i.e. a recession that translates into unemployment and falling wages, where the most recent data suggests is actually picking up with wages now rising at 1.6% per annum, their fastest pace for many years and above both official inflation indices.

Therefore today's deflation is wholly as a consequence of the collapse in the oil price which is good from Britain, well most of Britain, except that northern bit that wanted to declare independence a few months ago and had based its whole economic programme around crude oil prices beyond $120 a barrel delivering huge tax revenues which is set against a break even oil price of $60, that compares against the current price of just $47 i.e. an independent Scotland would already be bankrupt!

Another major gaping hole in the understanding of the deflation / inflation debate is that there are literally £586 billion reasons why there is no real deflation nor will there be deflation, and that is the amount of debt that the Coalition government will have printed over its term in office, debt that will NEVER BE REPAID but rolled over in perpetuity, even the interest due is paid with more printed debt. Which is the primary reason why the UK will never experience sustained deflation because ALL governments print debt to buy votes which causes inflation as illustrated by the ConLib's deficit forecast -

29th June 2010 - UK ConLib Government to Use INFLATION Stealth Tax to Erode Value of Public Debt

Therefore it is difficult to see how the government will be able to achieve its stated budget reduction target of getting the annual deficit down to just £20 billion by 2015-16. Whilst the government is expected to trend close to target for the next 3 years, however thereafter the governments (OFBR) and my deficit forecasts diverge as the coalition governments primary focus will be towards getting re-elected in May 2015. In all likelihood this means that total debt will be over £100 billion higher than that which the government is forecasting as illustrated by the annual budget deficits forecast graph below-

Whilst the ConLib's deficit reduction targets represent an improvement under the Labour governments target that would have resulted in extra borrowing of £478 billion over the next 4 years if the Labour government managed to stick to its targets. However the ConLib government will still expand total debt by £414 billion over the next 4 years, and £471 billion over the next 6 years to reach £1,242 billion, so hardly an earth shattering improvement.

The following updated graph for UK public sector net debt clearly shows that the Coalition government has hit a deficit cutting road block because instead of the deficit falling to around £37 billion for 2014-15, the government will be lucky if the deficit comes in at under £95 billion. Furthermore the trend for persistently high deficits is expected to continue beyond the May 2015 general election as the Coalition government has ramped up deficit spending to buy votes, the net effect of which would be for a total additional debt of £210 billion beyond the Coalition governments expectations to be added to Britain's debt mountain that looks set to pass £1.6 trillion this financial year.

This illustrates that the only answer / solution that all governments have remains one of stealth default by means of high real inflation hence the Inflation Mega-trend. Inflation is a REQUIREMENT for the Debt Based Economy, this is how governments keep putting off the day of reckoning by attempting to inflate the debt away with printed money and then borrowing more money to service the debt interest which is why virtually all money in an economy is debt money that will NEVER be repaid.

Whenever George Osborne or David Cameron are stating that they are paying down Britain's debt, they are LYING! The same goes for Ed Milliband if he states that he will cut Britain's debt. NO GOVERNMENT DEBT IS BEING REPAID OR WILL EVER BE REPAID! Instead the truth is that the WHOLE of the economic growth (in real terms) since the May 2010 General Election and continuing into the May 2015 General Election will be wholly as a consequence of some £586 billion of additional DEBT. Again this is a very important point to note that virtually ALL of the economic growth of this parliament is DEBT based, ALL of it, including the current election boom, the debt accrued over the 5 year term will equate to total real terms increase in GDP - virtually pound for pound which is why there is a cost of living crisis because printing money (debt) does not increase productivity, all it does is inflate the money supply.

This illustrates the reason for the real inflation truth that is far removed from that which the media focuses upon with the annual percentage rates of inflation that masks the truth of what is an exponential inflation mega-trend which is the primary consequences of perpetual money and debt printing monetization programmes that the government is engaged in, in an attempt to buy votes through high deficit spending, an inflation trend that asset prices are leveraged to and oscillate around to what amounts to an exponential trend.

UK CPI Inflation Index

UK Inflation Forecast

What we are presently seeing is the collapse in oil prices trickling its way through sectors of the economy. The current sideways trend in oil prices implies its effects should be over within a couple of months when inflation will once more start to rise back towards pre-oil price crash levels i.e. I expect CPI for January 2016 to be at least 1.5%, with RPI approaching 2.5%. So enjoy current deflation because it won't last.

The bottom line is that the Inflation mega-trend is exponential and the politicians, central banks and their vested interest academics deflation fears amount to nothing more than propaganda so as to allow governments to print debt (money) to buy votes with during an election year which ultimately means that a couple of years from now CPI Inflation will back above 2% as the Bank of England will use the cover of deflation to print more money to monetize government debt.

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By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2015 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 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 focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 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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© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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