Inflation Part 2

Mark Sandford - October 2012
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This week, the inflation rate for the UK economy was reported by the ONS to be 2.2% in September 2012, a fall from 2.5% the month before. This will obviously provide a little but welcome relief to hard pressed households and businesses in the immediate future. The CPI measure of 2.2% was driven by smaller rises than expected in prices of furniture, clothing and gas. The rate has now dropped almost to the Bank of England target of 2% as the Governor, Sir Mervyn King claimed that it would do so. This again reflects the continuing squeeze on disposable income and stagnant wage levels arising from the aftermath of the recession.

The ONS has also highlighted price increases by the major utility companies for electricity and gas as one item of concern for the near future. However the CPI measure of inflation examines a huge range of goods and services purchased by consumers in the shops and online too. The conditions are not there to see a big rise in inflation due to current weakness in the economy as regards growth and employment. George Osborne would welcome falls in inflation and unemployment no doubt as evidence that government policy is working, but he has an awful long way to go yet. More importantly, low inflation helps inward investment and exports, which in turn assist creation of more jobs.

There is also more concern being expressed at different levels over food prices due to poor harvests in the UK and USA. This was caused by a combination of drought in America and a monsoon like summer in the UK that hit crops of all description. The UN FAO or Food and Agriculture Organization has forecast a decline in global cereal production of 2.6% down to 2.286 billion tons. Meat prices have also risen notably in pig and poultry that rely on grain based animal feeds. This also reflects the changing lifestyle of more affluent populations in Asia that are adding more meat and fish to their daily diet.

The FAO's food price index has gone up to 216 still below the record 238 attained in February 2011. This means that the risk of volatility in food prices is certainly still there and needs to be watched in the near future. Never forget that increases in the price of food hit the poorest populations harder than those in the developed world and can often lead to unrest. The Arab Spring of a year ago was not just triggered off by the frustration of educated youth that had no jobs to go to, but also by rises in the cost of staples such as wheat.

www.bbc.co.uk/news/business-19827998 and www.bbc.co.uk/news/business-19959827

Mark Sandford - Permission granted to freely distribute this article for non-commercial purposes if attributed to Mark Sandford, unedited and copied in full, including this notice.

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