The UK’s inflation myth | FT Alphaville

The UK’s inflation myth

Told ya.

From Reuters…

RTRS-UK NOV CPI 0.2 PCT MM, 4.8 PCT YY (FORECAST 4.8 PCT YY)

RTRS-UK NOV RPI 0.2 PCT MM, 5.2 PCT YY (FORECAST 5.1 PCT YY)

RTRS-UK NOV RPIX 0.2 PCT MM, 5.3 PCT YY (FORECAST 5.2 PCT YY)

RTRS-UK NOV CPI ALL GOODS 5.1 PCT YY, ALL SERVICES 4.3 PCT YY 09:30 13Dec11

RTRS-ONS – FOOD, TRANSPORT, CLOTHING, FURNITURE LARGEST DOWNWARD PRESSURES ON CPI; ALCOHOL, TOBACCO BIGGEST UPWARD CONTRIBUTORS

… And the ONS

The Bank of England said inflation had peaked and would fall back sharply in coming months. And that looks to be playing out.

Indeed RBS economists Richard Barwell, Gareth Anderson and Nick Matthews reckon the MPC could get a nice inflation surprise in 2012 as the impact of VAT is washed away.

Inflation has been above the target for most of the past 5 years, and is considerably higher than in our major trading partners like France. The pace of inflation appears to have increased across most items in the basket.

These observations have led some to conclude that the UK has an inflation problem which will persist and ultimately prove a constraint on further monetary stimulus. We continue to believe there are more prosaic explanations – not least successive increases in the standard rate of VAT in the United Kingdom.

There is considerable uncertainty around the extent and speed of pass-through of changes in VAT and in this note we illustrate the inflationary consequences of alternative judgements on these issues.

Our modal estimates suggest that the 2011 hike in VAT is currently adding around 1½ percentage points to headline inflation. Strip out the contribution from VAT and the inflation overshoot relative to France and the upward shift in the distribution of inflation at the item level largely disappears.

Read my lips – the UK does not have an inflation problem.

These VAT contributions should start to drop out of the year on year comparison in the December CPI print, with 100 basis points dropping out by January, although we believe it will take until mid-year before the impact of VAT fully washes out.

For once, the MPC should get a nice inflation surprise. The Committee’s assumption of 75% pass-through looks a touch cautious to us, so inflation should fall by more than the MPC expects.

Related links:
Consumer Price Indices November 2011 – ONS
Prospects for monetary policy: learning the lessons from 2011 – Spencer Dale