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Inflation jumps by record amount

Inflation jumped in December to 2.9 per cent up from 1.9 per cent in November 2009.

According to the Office of National Statistics, the Consumer Price Index recorded its biggest jump since records began in 1997.

The retail price index is also estimated to have risen sharply, up from 2.1 per cent in November to 2.4 per cent in December 2009.

The Government figures reveal that the sharp pick up is largely attributed to energy price falls at the end of 2008, but the cut in VAT from 17.5 per cent to 15 per cent in December 2008 also played a large part. Bank of England governor will have to write to Chancellor Alistair Darling this month and explain why inflation has risen past the Monetray Policy Committee’s target of 2 per cent.

Schroders European economist Azad Zangana says economists will be concerned to see that core inflation, which excludes volatile energy and food prices, increased to 2.8 per cent over 2009 despite the UK experiencing the longest and deepest recession in 70 years.

He says: “This morning’s shock will put inflation firmly back on the agenda, especially as next month’s inflation figure will rise above 3 per cent and trigger a letter from the Bank of England to the Chancellor to explain why inflation has once again risen above their 2 per cent target.
 
“Whilst the latest inflation estimates are a surprise, we do not expect the Bank of England to panic and raise interest rates. This should spell the end of quantitative easing in February, but worries over growth and rising unemployment will keep the monetary policy committee in ‘wait and see’ mode for some time.”

Corceo director Andrew Montlake warns that this is a “real shot across the bows” for mortgage borrowers, many of whom are on variable rate mortgages at present, either because they cannot remortgage or because they have decided not to given the discount on variable rates relative to fixed.

He says: “If rates rise to contain inflation then many borrowers will find themselves with significantly higher monthly payments.”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Quantitative easing, is that not another name for deflation, any idiot can see that the £ has devalued against the Euro which has the knock on effect of increasing the cost of our imports and fuel, this was never a miracle cure.

  2. Nobel Prize winner and columnist Paul Krugman, the pop star of the U.S. economists who didn’t see the crisis coming, recently estimated that the U.S needs 300,000 new jobs each and every month for the next five years — 18 million in total. But that’s not happening … To me, that’s further evidence that the stock market’s recovery has not begun.

    Historically, payrolls start to expand immediately after a recession is over. So maybe this recession is not really over yet, or maybe it’s something else, that is to say a depression, currently waiting for the next shoe to drop.

    Dr. Krugman, as I said, didn’t see the whole
    mess coming. But he sure knows what the remedy should look like. His suggestion: The Fed should expand its balance sheet by another $2 trillion.

    Obviously Krugman recommends inflating the way out of this crisis. He probably believes in the so called Phillips curve. It stipulates an inverse relationship between the rate of unemployment and the rate of inflation … when unemployment rises, inflation drops and vice versa. It was very popular during the 70s.
    Helmut Schmidt, former German Chancellor, famously justified this theory by saying to prefer a few more percentage points of inflation to a few more percentage points of unemployment. He finally got both in spades.

    History is full of examples of post-bubble economies that clearly show us to expect a long, drawn out adjustment process. And with Helicopter Ben at the Fed’s helm, a government dead set on a spending and a debt binge never seen before, I fear the worst.

    Given the fiat-based monetary system and banks’ vested interest in expanding credit, I have no doubt that most nations will experience very high inflation over the coming decade.

    Accordingly, I suggest that long-term investors protect their purchasing power by allocating capital to precious metals, commodity producers and fast-growing businesses in the developing world.

  3. Quantitative Easing – isn’t that just printing money…something governments do when they have none. Third world governments that is.

    I agree we are in the midst of a depression and the cash injection of funds by US and UK is only stalling the inevitable true correction we need to see happen. The stock markets will collapse again this year when the reality of this sinks in.

  4. We need higher interest rates like a hole in the head. The fact that the UK has always suffered higher interest rates than our competitors, is why we have suffered consistent underinvestment in our internationally tradable goods manufacturing facilities. If the cost of capital investment and borrowing for productive investment rises then that investment will not happen in the UK. Hence our balance of payments and trade deficit being the worst in the world. High interest ratess will ensure that all we can do to survive for a little longer is to sell off what few assets are UK owned. Cadbury which is about to be sold to Kraft is one of the last big UK companies paying Corporation Tax which makes a contrubution to the UK economy. As soon as Kraft get it they will do what Kraft have always done in the UK which is to closel every factory they have owned here and shift productoin abroad. Higher interest rates will finish off the UK totally.

    What we need is powerful fiscal control to discourage consumption. We HAVE to increase exports and decrease imports. That means buying less from abroad and selling more abroad for the next ten years to recover from the reckless economic expansion based on spend spend spend philosophy of G Brown.

    Who really beleives that high interest rates will cure the damage down to investment and savings by G Brown? We need taxes on consumption, restriction on private credit expansion, cars only to be available on a cash down basis and the same for all goods purchased for home use. We need to save up for our purchases such as furniture, electrical and electronic goods, after all they all imported. What availabel bank credit is available needs to be going 100% into business investment primarily in the creation of internationally tradable goods and sevices. We need a good old fashioned credit squeeze. NOT INCREASED COST OF CREDIT. REmember that if interest rates rise, the cost of Government borrowing will rise. With a National Debt in two years time approaching 75% of GDP ( Plus the Public Sector pension black hole of another £tr) and with a shrinking GDP this will be a National Debt approaching a £tr every 1% interest rate costs the economy £10billion.( again ignoring the public sector pension burden)

    When will people ever learn? High interest rates are the prercursor of inf lation not the cure. No output ever occurs without investment, making investmenmt expensive will reduce it, that increases unemployment and output, which reduces internal competition and allows imports to be sold at inflated prices as there is no home produced competiion and any way what are we to sell to pay for the imports. We have to have more exports more output and that needs more investment and less consumption and less Govenment spending on cynical creation of worthless and unproductive jobs. Higher interest rates!!!!!!!!!!! Unbelievable. The most sucessful countruies have had lower interest rates than ours

  5. When inflation happens, thats usually it, so if we get 10% inflation but then it drops back to 2%, it HASNT recovered, it has just become embedded. This is because its a rolling figure over 12 months. Get ready for inflation because this Govs debt is so huge we will want to inflate it away. What a fiasco. This mess will be with us for 20 years+. This is what happens when you let a socialist in charge of the vault. Golden Brown has taken the great out of great britain.

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