Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

UK CPI Inflation +2.4%, RPI Deflation -1.2% Hits Forecast Target

Economics / Deflation May 20, 2009 - 01:05 AM GMT

By: Nadeem_Walayat

Economics

Best Financial Markets Analysis ArticleUK RPI Inflation data of minus 1.2% for April 09 represents severe deflation in the official data. Whilst the Governments preferred CPI inflation measure has recorded a smaller decline to 2.3% which still stubbornly puts it above the Bank of England's target rate of 2%. RPI deflation is not 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 this is providing for mini 'temporary' cash flow boom for those mortgage holders that have secure employment during the recession and therefore contributing to the summer bounce in house prices.


However the temporary bounce in house prices needs to be set against the bursting of the asset bubble that has seen UK house prices fall by 21% from the peak of August 2007. UK deflation in the face of the bursting of the asset bubble has now hit the inflation target of -1.2% and therefore expected to reverse trend on the RPI measure over the summer months with signs that the preferred measure of CPI is already warning of gathering inflationary clouds as the gap between RPI and CPI Inflation continues to widen to new extremes.

The trend in inflation data remains inline with my original forecast as of Dec 08 that forecast deflation into mid 2009, followed by a slowly rising inflationary trend during the second half of 2009. RPI of -1.2% will also have the effect of depressing wages as this measure is used to determine pay deals therefore continuing deflation throughout 2009 despite money printing which suggests some overshoot on RPI to the downside.

UK Money Supply - Deflation

Whilst UK Money supply M4 (blue) has risen sharply from the 10% targeted low of mid 2008 to the current level of 17.7%, on face value this is highly inflationary and has been taken by some economists and market commentators to suggest much higher forward inflation. However the money supply adjusted for the velocity of money which takes into account the state of the economy as a consequence of the credit freeze tells a completely different story. The UK economy is now in extreme real monetary deflation of approaching -30%. The leading indicator of the implied money supply, is suggesting recent deep interest rate cuts to just 0.5% have so far failed to lift future money supply growth out of extreme deflation which therefore continues to suggest deflation for all of 2009, and hence implies inflation could overshoot to the downside against the forecast trend mentioned earlier.

Budget Deficit and Quantitative Easing

The Bank of England has already printed £125 billion of money so as to buy mainly government bonds in response to the huge budget deficit that the Labour government will rack up by the end of this year that projects to £175 billion which is up from £38 billion in November. The outlook for subsequent years also remains for bleak with deficits expected to continue for many years as Alistair Darlings own forecast for government net borrowing over the next 4 years has grown from a deficit of £120 billion in November 2008 to £608 billion as of the budget, which is still significantly below my forecast total of £735 billion and therefore the expectation remains for further revisions to the upside over the coming years. This confirms my view that the Bank of England will continue printing money into year end to beyond the £150 billion current arrangement. Which on face value is both inflationary and supportive of the economy.

UK Recession Forecast

Total GDP contraction to date now stands at -4% on a quarter on quarter basis, which is against my forecast for -6.3% total into Q3 2009, which strongly suggests that GDP contraction during the 2nd and 3rd quarters for 2009 'should' now moderate i.e. we are unlikely to see another figure as bad as 1st Q -1.9%, more probably the 2nd quarter GDP is likely to be at -1%. Whilst a bounce back in the economy is expected going into the 2010 election, however the tax hikes and spending cuts will in all likelihood trigger a double dip recession during 2011 to 2012 as illustrated by the above graph. What this means is that there will continue to be a major shortfall in tax revenues and therefore continuing budget deficits and hence deeper public spending cuts and therefore continuing downward pressure on prices and hence inflation may remain subdued even beyond 2010 after a temporary rise inline with the bounce in GDP.

UK Inflation Conclusion - Extreme Deflation as measured by RPI is near an imminent end, forward inflation will remain subdued despite economic recovery into the 2010, election as the risks of a double dip recession remain which would be accompanied by lower inflation.

Subscribe to my always FREE Newsletter to receive my key forecasts and analysis in you in box.

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.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

mandy
08 Sep 10, 15:17
inflation

Thanks for clarity of vision


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules