Finally – Irish retailers get a break as inflation explodes in the UK

The Euro has fallen against Sterling to approx. 87p on the news that Consumer Price Inflation rose sharply to 2.9% in the UK in December. Bloomberg report that

“The CPI number is a shocker,” said Peter Schaffrik, a co-head of interest rate strategy in London at Commerzbank AG. “It means the Bank of England will have to rein in its monetary stimulus, perhaps sooner rather than later. We are avoiding gilts, especially at the front end. It’s difficult for the market to outperform others against this backdrop.”

From an Irish perspective, Mervyn King now faces a hobsons choice – to continue on the same course and allow UK inflation to run riot, increasing prices and reducing competitiveness north of the border – or he can take decisive action to reduce inflation (reigning in Quantitative Easing or raising interest rates) that will strengthen the pound against the Euro and thus increase prices (measured in Euros) and reduce competitiveness north of the border.

It’s almost certain at this stage that inflation will breach the 3% limit beyond which Mr. King must explain himself to the British Chancellor. I can almost hear the conversation – “Southern Irish shopping trips to Newry are sooooo last year.. um.. Darling”.

  • Coll Ciotach

    I do not think it at a crisis level, but if they continue to print money they probably will stoke inflation to unacceptable levels

  • CongalClaen

    Can’t imagine the RoI featuring in Darling’s conversation. IRs will definitely have to go up. They were held artificially low for housing. When they do housing will be hit again. Badly. That could have implications for NAMA holdings north of the border. Shopping won’t fill that hole…

    BTW, I don’t mean Newry ;0)

  • Mack

    CongalClaen –

    Nah of course not, just wanted to use the Chancellors name for a dodgy pun while I had the chance..

  • Neil

    Explain to me if you can what this means for my sterling come the summer jollies? Looking better at the minute anyway.

  • Henry94

    Meanwhile south of the border things are looking up

    A SURGE in consumer spending and a hike in exports will spark rapid recovery in the economy, three leading experts predicted last night.

    The head of the country’s biggest think-tank said there would be a modest lift in the economy in 2011 followed by a period of “quite rapid growth”.

    ESRI chief economist John FitzGerald said: “We will see a vigorous recovery in 2012.” He added that the economy could expand by as much as 5pc a year between 2012 and 2015.

    Late last night, his comments were echoed by Dr Alan Ahearne, adviser to Finance Minister Brian Lenihan.

    He claimed lower costs were already “kickstarting growth”. And in a special report, Bank of Ireland economist Dan McLaughlin forecast that a substantial increase in exports in 2012 would help a recovery.

    http://www.independent.ie/national-news/spending-splurge-to-spark-the-recovery-2020792.html

  • Mack

    Neil –

    It could go either way, the markets seem to be presuming that Mervyn King will get tough – if he does there’s a good chance Sterling will appreciate in value, if he doesn’t it may well collapse in value..

  • Jimmy_Sands

    The reporting appears to take a consistently “glass half empty” angle. I don’t claim to be an economist but is the inflation figure an indication that the stimulus may have had some positive effect?

  • Jimmy,

    None of that nonsense, you know better than to bring good news to slugger, I can just see mack licking his lips and demanding ever more guts, sorry cuts.

    It was not that long ago when folk were complaining that a zero rate of inflation is unsustainable as it would drive the economy closer to collapse.

    Like most bankers and economic forecasters I have absolutely no idea about economics, but to get into a panic over a rate of inflation of 2.9% seems a bit premature.

    During most of my life time a UK Chancellor would have killed for 2.9% inflation.

    UK inflation has ‘exploded’ my arse.

  • Paddy Matthews

    And in a special report, Bank of Ireland economist Dan McLaughlin forecast that a substantial increase in exports in 2012 would help a recovery.

    Ah, Dan McLaughlin makes a reappearance.

    There are witch-doctors in the highlands of Papua New Guinea with better skills of prediction (and a better understanding of economics) than that particular property shill.

  • Dazzler

    I am not suprised by this. The UK deflated its currency. A weak pound means that imports become more expensive and subsequently pushes up prices.

    Its the opposite in the south. The strength of the euro is pushing prices down. All things being equal the euro and sterling will equal out meaning prices in newry and dundalk will become equal.

    2.9% in December. The January figures will be closer to 4% due to the increase in the UK Vat rate.

    I expect the next 2 years will see a period of UK hyper-inflation.

  • I’m still trying to absorb the bias here. This is a site which headlines “Notes on Northern Ireland politics and culture”. Yet here is a thread which, one-eyed, sees the perspective from that of RoI retailers and consumers.

    Let’s try a re-framing.

    1. The UK (not forgetting the NI bit) inflation rate is 0.3% higher than generally predicted. The general assumption is this is the result of (a) higher petrol prices, as the weak prices a year ago drop out of the calculation; and (b) last year the retailers were struggling badly, and having wholesale fire-sales, while this year consumer confidence and spending are up, so retail prices have made good that discounting; (c) there was an incentive to spend with VAT returning to 17½%.

    2. That, believe it or not, is largely good news: (a) it confirms that the QE phase is completed (as Andrew Sentance implied); (b) we have avoided continuing deflation (unlike … errr … elsewhere); (c) that the recession is probably over (and internationals, like Kraft, are paying megabucks to buy into the UK); (d) that some normalities are restored; UK housing index up; industrial production up; retail sales up; imports down; unemployment a whit less grim than predicted.

    3. At the turn of the year, the nay-sayers were assuring us that sterling faced parity with the €. Today, the € is 87p, and heading south. So:

    Q: How much does a Greek owe?
    A: Enough to make a German eff.

    Today, too, Goldman Sachs reckon UK growth in 2011 will exceed all other major economies.

    Y’know: it all looks as if the BoE/Treasury strategy is working.

    Now, is there the slightest hope that Slugger could find an economist who doesn’t suck every green lemon in sight?

  • Drumlins Rock

    Any chance we can scrap Macks post and put Malcolms up instead?

    I wasnt that surprised by todays news, and I never did go the “deflation hype” floating about last year, the weak pound was bound to lead to it happening, I dont think Mervyn should panic yet, just keep an eye on things and it probably peak in march or april, the cuts in government spending and tax rises will probably take enough out of the economy to do all the cooling that is required after that.

    As for post 5 from Henry, I thought the pantomime season was over? It is actually concerning that things have got to the stage the southern economy has to be hyped up like this, have they any evidence to base these predictions on?

  • Alias

    I agree with Mick Hall on an economic matter (amazingly): inflation under 3% is hardly a sign of a poorly managed monetary policy.

    Considering that interest rates have been set by the Bank of England at a very low rate and the massive quantitative easing they have engaged in, they did well not to go over the 3% limit.

  • Jimmy_Sands

    Some of us are still holding out against the Cameron love-in.

  • Alias

    Although, regarding Mack’s point about retailers in Ireland benefiting: Consumer Price Index deflation of 2.6% in Ireland during 2009 combined with inflation of 2.9% in the UK should translate to a closing of the gap between retail prices in Ireland and Northern Ireland of circa 5.5% – the gap widening between the Euro and Sterling should also help retailers in this jurisdiction.

    The problem the UK has going forward is that it engaged in the biggest fiscal stimulus package of any of the major economies in the EU but is the slowest out of the major economies out of recession – and it will emerge with a mountain of debt to be repaid, thereby forcing it to keep interest rates as low as possible, running the risk of inflation increasing still further. Massive debt, unemployment, and rising consumer prices will kick in after the next general election as it is the policy to pay the piper at some future point.

    Ireland wisely avoided the Keynesian economic stimulus packages that the UK engaged in – and, of course, emerged from recession without them, thereby showing that government spending is not required as a condition of emerging quickly from a deep recession. That will be a very painful lesson for future generations of UK citizens to observe as they struggle to repay the legacy of debt that they will have inherited from Labour.

  • Drumlins Rock

    “Ireland wisely”

    ROTFLMAO

    yup Ireland is completely debt free.

  • Dazzler

    Ireland (26C) is in debt yes, but have been heavily praised in Europe for taking the tough decisions in reducing public spending and restoring competiveness. The UK has not made any hard decisions and allowed their debt to soar to very worrying levels.

  • The RoI problem began by exploiting the laxities (financing private over-consumption) and ended being strangled by the constraints (enforcing public devastation) of the EMU. As a result, welfare has been cut, unemployment is up enormously. The cost will also be in long-term damage to the infra- and the social-structures. But, hey!, better to worry that UK national debt rises to EU levels.

    Meantime, what should we say about a “rich” first-world nation which cannot deliver water to its citizens? Or guarantee the safety of its railway bridges? Who, with any hint of charity, would trade significantly higher cancer incidence for a trivial budget cut?

    If Dazzler @ 11:17 PM, or anyone else reckons it’s all been worth the pain, consider that trenchant letter in Monday’s Irish Times, from the Association of Garda Sergeants and Inspectors. When a body as orthodox as that can make points like these, there really is trouble:

    … public servants contributed 6.5 per cent of their pay towards their pensions up to last year, and now contribute more than 13 per cent, courtesy of the pension levy, while the Government only contributes 3.5 per cent.

    For many years the Government contributed even less to the scheme and will continue to make considerable savings from the fact that public servants recruited before 1995 will not receive a statutory old-age pension …

    The letter then nails the faults of the PRSA and AVC systems. Then comes a telling point:

    At present the top earners in our society receive almost as much in tax breaks as all our contributory old-age pensioners receive — €3 billion versus €3.4 billion.

    A national budget can be balanced and “tough decisions in reducing public spending and restoring competitiveness” can be achieved. Announce that 10% fewer patients will receive hospital treatment. Cut back on medical staff: after all, only the sick and old will suffer. Screw the farming community. Reduce wages. Hack back education. Bring back emigration. Sorted.

    Yeah: there’s “worrying levels” of something there.

  • Paddy Matthews

    @Alias:

    Ireland … emerged from recession

    Look around you.

    GDP may have technically increased in the third quarter of this year, but the general expectation is that it will decline by a further 2 to 3% this year. We might get growth in two years’ time, apparently, according to the ESRI, whose previous forecasts were less wildly inaccurate than Dan McLaughlin’s.

    Might, assuming that the global economy picks up strongly.

    Retail sales continuing to decline.

    Consumer confidence stagnating or declining.

    Unemployment continuing to increase.

    Emigration increasing.

    Exports declining.

    And a gigantic gamble called Nama on property values increasing over the next ten years at the same time as other policies rely on wages and disposable income declining and emigration increasing.

    If this is a quick recovery from recession, then God help us all.

  • Mack

    A couple of points..

    #1 The inflation rate increased by 1% in a single month – December. That’s a 12% annualised rise in the rate of inflation (that would put it at 15% by next December – hyperinflation territory). This means the British Chancellor has to act, and the British pound has strengthed as a result – the weak pound hammered Irish retailers, so a strong pound means ….

    #2 This is a good news story from an Irish retailing perspective. I’m covering events on Slugger from a southern Irish perspective.

    #3 Ireland could never follow the same path as Britain. Unfortunately, as a good dose of inflation to reduce our debts in real terms is exactly what is needed (and devaluing our currency to increase competitivenes would be more pleasant than reducing costs the hard way).

    Any chance we can scrap Macks post and put Malcolms up instead?

    Not a chance 😉

  • Mack @ 10:03 AM:

    I recall TCD’s Professor WB Stanford lecturing on the Odyssey, and proposing that “hysteria” derives from squealing pigs [the Greek “hus” being cognate with the Latin “sus”].

    Now Mack makes a personal advance on sado-economics to invent hystereconomics. When else did it become acceptable statistical practice to exaggerate one month’s figure, and extrapolate it to a full year? I’m long enough in the tusk to recall that a similar freak, caused by BA importing a couple of jumbo-jets, equally puffed up by partisan Tories, eased Ted Heath into power in 1970.

    Here is a more rational appreciation, the collective view derived from the PA:

    The surge was because VAT was unchanged last month compared with the Government’s temporary cut to 15 per cent to help the economy a year earlier, the Office for National Statistics (ONS) said…

    The ONS figures showed average petrol prices edging 0.2p higher last December compared with a 6p fall a year earlier, which was the second biggest monthly fall on record.

    Clothing and footwear prices fell by far less than a year ago, when the temporary VAT cut came into price and many retailers were forced into early sales to tempt shoppers through the door during the worst point of the recession.

    Moreover, the BoE accurately forecasted this spike.

    In three Rathmines words, Mack @ 10:03 AM, catch yersel’ on.

  • Mack

    Moreover, the BoE accurately forecasted this spike.

    Not quite. They predicted annualised inflation would rise to 2.7% (from 1.9%).

    You would expect them to put a positive spin on things, but regardless it has raised the prospect of Britain tightening it’s monetary policy and helped Sterling rise / the Euro fall.

    Clothing and footwear prices fell by far less than a year ago

    Presumably they mean in the sales, rather than deflation, but isn’t that the point? Inflation was still positive in general last December in the UK.

    Here are some more reasons / events –

    the reduction in the standard rate of Value Added Tax (VAT) to 15 per cent from 17.5 per cent

    sharp falls in the price of oil

    pre-Christmas sales as a result of the economic downturn

    http://www.statistics.gov.uk/cci/nugget.asp?ID=19

    In the highly unlikely event that they don’t tighten monetary policy (immediately post-election, perchance?) & the global economy recovers, oil spikes upwards, sterling continues to slide – what will happen to inflation then?

  • Mack

    Also this might be interesting –

    http://www.marketwatch.com/story/uk-inflation-accelerates-at-record-pace-2010-01-19

    Economists had forecast a 0.2% monthly rise in December and a 2.5% annual jump. A big annual rise was expected as a result of comparisons to December 2008, when a range of extraordinary factors served to knock the consumer price index down by a record 0.4% from November.

    Prices rose 0.6% between November 2009 and December 2009.

  • Mack @ 01:59 PM:

    So, in summary, you concur that there were those exceptional factors, which I have called in aid twice. You now rely on a 0.6% CRI increase in December (were you not basing your previous excesses on a full 1% increase?) — as if check-out prices in a “normal” year (and December 2008 was definitely not “normal”) do not creep up in December.

    All we are left dividing us is your curious fantasy that we are about to visit Weimar-on-Thames. Even then, how would that benefit (your headline point) the RoI producer and consumer?

  • CongalClaen

    Hi Malcolm,

    VAT was the same in December 2008 and December 2009. So, next month I’m expecting inflation to surge through 3% as VAT goes back up to 17.5%.

    Gordon Clown has fekked our economy with his artificial setting of interest rates to suit house price increases. It’s funny tho that the RoI, being so different form the rest of the British Isles followed us down the same path by encouraging property speculation.

  • CongalClaen @ 04:08 PM: Well, you got one thing correct there. VAT was reduced to 15% from 1st Dec 2008 to close of business 31st Dec 2009/a.m. of 1st Jan 2010. Beyond that …

    I see you take your inflation forecasts from the likes of Nadeem Walayat at Marketoracle.co.uk. Fair enough: his is one view, not always accepted and less often proven authoritative, in a crowded punditry.

    All that allowed, your comment goes to buggery with:

    1. Failing to recall that, as incoming Chancellor in 1997, Brown passed rate-setting to the BoE. Unless you know to the contrary, that decision has not been recanted.

    2. Assuming that the example of UK “property speculation” was merely imitated by the RoI. I’d like to see any hard factual evidence thereon.

    3. Copying hackneyed, unimaginative and uninstructive abuse and invective from the “window-lickers” of Guido Fawkes and other poisoned sources does not enhance intellectual credibility.

  • Mack

    Malcom –

    There are always exceptional circumstances or reasons things happen.
    do you conur that printing money can be inflationary.?

    You now rely on a 0.6% CRI increase in December (were you not basing your previous excesses on a full 1% increase?)

    0.6% is a month-on-month increase – 1% is the monthly increase in annual inflation for dec..

  • Mack

    To clarify –

    0.6% is a month-on-month increase in prices – 1% is the monthly increase in annual inflation for dec..

  • To both of Mack‘s last posts:

    D’Oh!

    Yeah, somehow I think that diluting the currency might, just, have that effect. [Now, ask why: because it might not be something bad. Especially if the alternative is deflation.]

    Plus: it is usual to define one’s terms and to be careful one does not confuse the variables.

  • CongalClaen

    Hi Malcolm,

    Whilst rate setting officially passed to the BoE, Clown still put pressure on to have rates set artificially low. In 1994 (not sure if it was 94 but around then) for example when housing should have corrected the pressure was applied and rates were duly lowered. This gave the impression you couldn’t lose on housing.

    He also changed the inflation measure to CPI which conveniently ignores housing costs.

    At one stage he tried to get housing into pension schemes before scrapping it at the last minute. Thankfully, or things would be even worse!

    He also taxed pension dividends which has had a major effect on pensions. How many times over the last 13 years have you heard people saying that their house was their pension scheme?