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UK RPI Inflation data
of minus 1.3% for August 09 continues to show deflation moderating from the
June low of -1.6%. Whilst the Governments preferred CPI inflation measure recorded
a slight dip to 1.6% from 1.8% dipping further below the Bank of England's
target rate of 2%.
RPI deflation in the
face of panic interest rate cuts from 5% at the beginning of October
2008 to just 0.5% by the last cut of March 2009, coupled with unprecedented quantitative easing
aka "money printing" to drive down long-term interest rates and
hence mortgage rates resulted in deflation for those with large mortgages of
as much as minus 5%, therefore this as I mentioned some 4 months ago would
provide for a for mini 'temporary' cash flow boost for those mortgage holders
that have secure employment during the recession and therefore contributing
to the summer bounce in house prices that has now transpired and looks sent
to continue into the end of the year and therefore contribute towards upward
pressure on consumer 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 deflation targets
for 2009 and therefore the expectation is for the trend to start reversing
back towards inflation over the coming months with signs that RPI has already
bottomed out and the CPI warning of gathering inflationary clouds as the gap
between RPI and CPI Inflation hit extreme levels during mid year which now
looks set to narrow.
 
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 -1.3% 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 suggested overshoot on RPI to
the downside that has come to pass.
My recent article Bailed
Out Banks Not Lending, Sitting on Tax Payers Cash, illustrated why
quantitative easing is not resulting in run away inflation that many gold
bugs have been hoping for as basically the banks are refusing to take risks
and instead using tax payer cash to earn interest on deposits at the Bank of
England.
UK Money Supply - Deflation
Whilst UK Money
supply M4 (blue) remains at a high 10% off of its earlier high 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 crisis tells a completely
different story. The UK economy remains in extreme real monetary deflation of
approaching -25%. Both this and the leading indicator of the implied money
supply, are suggesting that the deep interest rate cuts to just 0.5% and
quantitative easing of £175 billion have halted the economic collapse
into out of control deflation, but we are far from a state of entering a high
inflation environment which therefore continues to suggest strong
deflationary pressures for rest of 2009 and into 2010.
Budget Deficit and
Quantitative Easing
Virtually all of the
mainstream press swallowed the Bank of England's hints and winks that
Quantitative Easing had ended at £125 billion. All except myself that
projected towards Quantitative Easing of £300 billion by the end of
this year with the current tally now standing at £175 billion of money
printed so as to mainly buy 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 Alistair Darlings projection
of £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 £175 billion revised arrangement though probably
less than the £300 billion suggested some 10 months ago. Which on face
value is both inflationary and supportive of the economic bounce.
Engineering an
Election 'Winning' Economic Recovery
The forecast date for
the next General Election as of October 2007 has been for May 2010, with the projected
seats implying a small Conservative victory of a majority of 36. Clearly
all is not lost for the Labour government, therefore the primary aim now is
to reduce this projected small majority by as much as possible if not to
totally eliminate it, to achieve this the government has thrown ALL of the
fiscally responsible rules out of the window starting last
October having embarked on a programme of maximising the number of seats
Labour will retain at the next general election. One of the key milestones
set by the Prime Minister Gordon Brown of achieving this objective is in
successfully and publically achieving a strong economic bounce into May 2010.
My on going analysis confirmed a bounce into a May 2010 general election as
long ago as February
2009, with more recent analysis confirming this outlook (UK Economy
Set for Debt Fuelled Economic Recovery Into 2010 General Election)
Whilst the OECD and
other mainstream organisations / press have been busy in recent months
revising their economic forecasts, my forecast remains as is and continues to
project towards post general election tax hikes and deep public spending cuts
that will in my opinion trigger a double dip RECESSION, even DEPRESSION
2011 to 2012 as illustrated by the graph below.
Deflationary Impact
of Rising Unemployment
The original forecast
of October 2008 (July 08 data) as illustrated by the below graph,
forecast UK unemployment to hit 2.6 million by April 2010. The actual data to
date of 2.47 million to July 2009 clearly continues to suggest a much higher
peak which remains on track to hit 3 million, as unemployment tends to lag
economic recoveries by anywhere from between 6 to 12 months.
A poignant reminder
of the lack of accuracy in the official unemployment data is observed in the
announcement that 1 in 6 households have no wage earner, i.e. all adults are
unemployed in a total 3.3 million households, which clearly suggests a number
of unemployed significantly above the 2.47 million official data of those
unemployed. The rising number of unemployed will continue to exert
deflationary pressure on the economy.
UK House Prices Against
Unemployment Trend Analysis
The original forecast
of August 2007 concluded with a forecast drop in UK house prices of between
15% and 25% by August 2009, which has materialised.
August 2007 Forecast Conclusion - The UK Housing market is expected to decline by at least 15% during the next 2 years. Despite
the 2012 Olympics, London is expected to fall as much as 25%. UK Interest rates are either at or very near a peak, as there is an increasingly
diminishing chance of a further rise in October 2007. After which UK interest rates should be cut as the UK housing market declines targeting a rate of 5% during the
second half of 2008. The implications for this are that the UK economy is heading for sharply lower growth for 2008
The above chart
indicates that there does exist a strong relationship between house price
trends and the unemployment benefit claimant count, more so than the
unemployment data. The possible reason for this is that those made unemployed
that do not claim benefits are not in as financially distressed state than
those that have no choice but to claim benefits, therefore house prices can
and have risen in the past whilst the official rate of unemployment rose, if
at the same time the claimant count did not rise.
The on going bounce
in house prices is tracking quite closely with the stabilisation of the
unemployment claimant count numbers, which therefore suggests that as long as
those claiming unemployment benefits continues to stabilise at the current
level of 1.6 million then the outlook remains positive for UK house prices to
continue drifting higher, this is despite official unemployment data that
looks set to continue to rise towards 3 million from 2.47 million.
Summer Bounce 2009 - The unfolding bounce
in UK house prices prices is inline with my May analysis that concluded that UK house
prices will experience a bounce during the summer months from extremely
oversold levels as a consequence of liquid buyers returning to the market and the debt fuelled economic recovery which 'should' be reflected in
rising house prices during the summer months that is increasingly being taken
by the mainstream press and vested interests to announce that the house
prices have bottomed, my next analysis will seek to expand on house price
expectations during 2010.
UK Interest Rates
The existing base interest rate
forecast as of December 2008 is for UK interest rates to
resume an upward curve towards the end of this year as a consequence of the
debt fuelled economic recovery into a projected May 2010 General Election as
illustrated by the below graph. UK interest rates hit bottom in March 2009
with the subsequent trend to date suggesting an unchanged base rates into
late 2009.
However real interest
rates have been in a steady climb since March 2009 which has increasingly
meant that the base interest rate has become irrelevant to the market place
as explained in the article - Bailed Out Banks Not Lending, Sitting on Tax Payers Cash.
The outlook remains
for rising market interest rates charged to retail customers regardless of
the base rate being held at 0.5% into the end of the year, which is
inflationary in terms of rising mortgage costs.
UK Inflation
Conclusion - The trend into Extreme UK Deflation as measured by RPI has come to
an end, forward inflation is expected to rise at a subdued rate as result of
the economic recovery into the 2010 general election with RPI targeting +1%
so Yes RPI Deflation will come to an end, but thereafter the high risk of a
double dip recession expectation suggests the shallow uptrend in inflation
will come to a halt during 2010 despite further quantitative easing and arm
twisting of the banks to LEND into 2010 as the Bank of England attempts to
increase the velocity of money by all means with even the option of negative
interest rates to force the banks to take risks rather than park their tax
payer bailout money at the BoE to earn risk free interest on.
In summary, I see no signs of a
return to high inflation during the balance of 2009 or the whole of 2010,
with the CPI trend expected to hover around the BoE 2% target. I will produce
an inflation forecast chart for 2010 later this year.
Ensure that you are subscribed
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UK house prices and also in the works a forecast for the UK economy covering the next 10 years.
Nadeem Walayat
Market Oracle.com.uk
Nadeem Walayat is the editor of
MarketOracle.co.uk.and has over 20 years experience in trading and investing.
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