Tuesday, 18 January 2011

UK inflation for December: 3.7% - QE is creating inflation as I expected.

In the post I published on the 16th of November 2010: "Another Letter from the Governor to the Chancellor - UK CPI at 3.2% in October", I continued to argue that inflation would keep rising in the UK. This post was the continuation of what I foresaw back in February 2010, that QE in the UK would be inflationary. It has been a recurring theme in my posts (see previous posts in April and May as well on why QE is inflationary).

I advised the following in February 2010, the need to track the movements of the CRB index, which could be done via the LYXOR ETF denominated in Euros.
I wrote:
"You need to closely monitor commodities prices because they are steadily going up again as the CRB index is showing. Lyxor CRB ETF denominated in Euros displays this increase: FR0010270033 is the ISIN."

The LYXOR CRB ETF was around 19.5 Euros in February 2010 when I previously posted:

Now the same LYXOR CRB ETF index is at around 24 Euros, a nice 24% increase nearly year on year (if you put the trade on that is...), reflecting the surge in commodities. The Thomson Reuters/Jefferies CRB Index (TR/J CRB) is currently made up of 19 commodities as quoted on the NYMEX, CBOT, LME, CME and COMEX exchanges. These are sorted into 4 groups, each with different weightings. These groups are:

Petroleum based products (based on their importance to global trade, always make up 33% of the weightings)
Liquid assets
Highly liquid assets
Diverse commodities.

In my book we have Stagflation in the UK, inflation, low growth, high unemployment.

"In economics, stagflation is the situation when both the inflation rate and the unemployment rate are persistently high. It is a difficult economic condition for a country, because when inflation and economic stagnation are occurring simultaneously, a policy dilemma results since actions that are meant to assist with fighting inflation might worsen economic stagnation and vice versa."

Keynes wrote:

"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some."

How do you stop inflation creeping up in the UK? Very simple, the Bank of England will be pressured to raise rates sooner than later, because Mervyn King must be tired of having to write a letter to the Chancellor regularly.

The governor must write to the chancellor every three months when the inflation rate deviates more than a point from the central target in either direction...

The RPI figure for the whole of 2010 was 4.6% - the highest rate since 1991.

Below inflation from 2000 to 2010 in the UK:

The Bank of England is indeed in a very difficult quagmire.

The risk of a double dip in for the UK economy is alive and real.

This is what I wrote on the subject on the 16th of November 2010:

"There is still a very real risk of a double-dip recession in the UK. At some point the Governor of the Bank of England Mervyn King will have to raise rates to counter the rise in prices. This will put additional pressure on housing prices as well as mortgages and put more households into trouble, which would impair even more the damaged balance sheets of many UK banks."

And yes, you can have inflation in a deflationary environment:

"The inflation debate or why you can have inflation in a deflationary environment"

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