Comment: Inflation is falling, but we all still need a big lift

By TERRY MURDEN
Published on 18/07/2012 00:00

HOORAY! At last some economic news to cheer. Inflation – now at 2.4 per cent – is at a 31-month low and, at this rate, will soon touch the Treasury’s 2 per cent target.

The Bank of England, which exhausted all its powers to control inflation, has been forced to let the market dictate its direction. The Bank has long expected it to fall from its September peak of 5.2 per cent once a number of factors, such as VAT rises, had worked their way out of the system,

This is only the second month in the past year that the governor, Sir Mervyn King, has not had to write a letter to the Chancellor explaining why the rate is above target – he only has to do so when it is 1 per cent above target – and, on current trends, he may not have to write another before he retires next year.

Falling food and commodity prices, and cuts to utility bills, have contributed to the lower rate and ministers hope that the extra money in consumers’ pockets will encourage spending to help with the recovery.

However, shops are sharply cutting prices without any sign of a surge in trade. Figures released today show that Scottish retail sales are stagnant and lag behind UK spending for the 15th month in a row. This is itself dampening inflation.

Some economists believe inflation could dip below 1 per cent by the end of this year. Good news, unless you are a saver, but also an indication of the country’s struggle with weak growth.

However, the fall in inflation will support those calling for more money to be pumped into the economy through quantitative easing (QE). Eyebrows were raised in the early days of the programme when it was suggested that the Bank’s bond-buying would reach £200 billion. It currently stands at £375bn and there were suggestions late last year that it could hit £500bn.

With inflation under control, the talk is that the Bank will push on with more QE, possibly in November, unless the economy shows serious signs of recovery in the next quarter.

But more QE will not please everyone. It pushes up the price of bonds and forces down the yields they pay investors. This is not such welcome news to pension funds, which are already demanding an end to the programme.

Shift in exports points to better balance

BRITAIN’s trade dependency on the European Union (EU) appears to be weakening as more exports head to countries outside the EU for the first time in more than 40 years.

The eurosceptics will no doubt seize on the latest data to prove their case for Britain’s withdrawal from the EU. Politics aside, the figures show how Britain, either by accident or design, has weaned itself off the EU and is, rightly, making inroads into the growth markets in Asia and South America. It is also likely that hard-pressed eurozone countries have seen a sharp decline in demand for British goods and services.

Economists at the Centre for Econmic & Business Research (CEBR), who undertook this latest research, note that Britain’s long reliance on the Commonwealth countries began to weaken in the 1960s as Europe’s war-battered economies began to recover. The shift hastened in the 1970s with Britain’s entry to the EEC and again with the establishment of various treaties and agreements including the single European market.

In truth, the figures for EU-focused exports are skewed by a number of factors, including re-exports into Ireland via Belfast. Furthermore, EU-dependency only related to the exports of goods, while the export of services has always been more heavily weighted towards the non-EU markets.

Technically, this is not the first shift in the EU and non-EU trade. There was a blip in February last year. But this was for one month only ahead of a resumption in favour of EU trade.

These latest figures are for three months and, with the eurozone countries unlikely to recover substantially any time soon, it looks like a new pattern has been set.

Further positive news for Britain is that greater exposure to the non-EU territories and the slowdown in imports due to the squeeze on household incomes will be good for the balance of payments which are expected to be in surplus by 2015 – the first time since 1997.