Inflation cited as major factor in historic decline in UK standard of living

The Institute for Fiscal Studies (IFS) released a study on March 21 noting that the recession and recovery period in the United Kingdom from 2008-2011 marked “…the first time that incomes have fallen over a three-year period since the three years from 1990 to 1993, and the biggest three year drop in real living standards since 1980-83.” Real household incomes fell a total of 1.6% over this time whereas in “normal” periods the typical UK household experiences an average income gain of 1.6% per year.

Inflation racing ahead of wage gains was cited as one of the most important factor contributing to this historic decline. Lower interest rates for savings had a large impact on the standard of living for retirees.

Deflation on earning power and inflation in the cost of household purchases has placed a double squeeze on UK residents. In this context it is interesting to note Bank of England governor Mervyn King lamentations during last month’s conference call to defended monetary policy in the latest Inflation Report. King partially defended the on-going accomodative monetary policy in the face of inflation stubbornly above the inflation target of 2%. King asserted that the recession was going to reduce the standard of living either through deflation of wages (impact from the economy) or the increased prices of purchased goods (impact from monetary policy). In his view, this adjustment appears inevitable. However, this recent study by the IFS seems to suggest that in trying to choose the “least bad” option, the UK may end up stuck swallowing both bad options.


7.5B pounds of investment targeting UK residential development

The Financial Times is reporting that investment interest is pouring into residential real estate in the United Kingdom and putting upward pressure on prices. The push is particularly strong in London which is attracting 71% of the 7.5B pounds targeting residential real estate. This adds up to pre-recession levels of investment activity in the London market. For more, see “Interest soaring in London land.”

Airfares in the United Kingdom Surge At A Record Pace

It looks like American flyers are not the only ones paying higher fares. Across the Atlantic, air passengers in the United Kingdom paid 16.1% more to fly in August than in July, a record seasonal increase. This dour news was part of the U.K.’s latest inflation report that showed consumer price inflation above the government’s 3% limit for a sixth month in a row. The core rate of inflation was up 2.8%, higher than the 2.5% consensus forecast. Maybe we can export some of our deflationary fears to help out the cause.

See “U.K. Inflation Unexpectedly Exceeds 3% on Air Fares, Food” for more details.

A surge in supply drives down UK property monthly prices for first time in 2010

CNBC International interviews Miles Shipside from Rightmove to discuss the health of the UK property market. Asking prices fell month-over-month in July by 0.6%. This small drop was the first decline of the year as supply overwhelmed demand. Click here for the video.

Inflation threat may be rising in the United Kingdom

Reuters reports that producer prices increased broadly in February in the United Kingdom:

“…annual gains were registered in all categories, suggesting many manufacturers are taking advantage of the recent pick-up in growth to pass on at least some of their higher energy bills.

Core producer output price inflation, which strips out food, beverages, tobacco and petroleum products, rose by an annual 3.6 percent, its highest rate since February 2009.”

When including energy and food prices, producer prices soared twice as high as expectations to 0.9%. The annualized increase of 5.0% has not been this high since November, 2008.

The Bank of England is betting that inflationary pressures will subside later in the year given spare capacity in the economy. Skeptics are growing…

Bank of England sets stage for maintaining easy monetary policy

The Bank of England set the stage for maintaining an easy monetary policy for some time to come in its latest quarterly Inflation Report.

The Bank of England continues to expect a “…a slow recovery in the level of economic activity” partially because “…it is likely that credit conditions will remain restrictive for some time and that the need to strengthen public and private sector finances will weigh on spending.”

Moreover, the BoE maintained its forecast for low inflation for the next three years claiming that “…it is more likely than not that inflation will be below the target [2%] for much of the forecast period, but the risks are broadly balanced by the end.” (The forecast ranges from -1% to 5%).

Bank of England Infation Forecast

Bank of England Infation Forecast

Given these conditions, the Bank of England will be in no rush to tighten (significantly) monetary policy anytime soon.

U.K. December CPI Hotter Than Expected

The Bank of England made it clear last year that it expected higher inflation rates in early 2010 given the increase in the VAT. However, with December’s CPI and core CPI both coming in hotter than expected – respectively, 2.9% vs 2.6% and 2.8% vs 2.3% – speculation is swirling about the BoE’s response. Bloomberg cites economists and analysts claiming that inflation may increase further and that rate hikes may start as early as May this year. (See “U.K. Inflation Rate Jumps Most on Record on Oil, Tax“)

The pound even spiked against the U.S. dollar on the CPI news before quickly selling off.