George Kerevan: At last, some good omens on inflation

IT HAS become a given that the rate of price inflation will fall. The Prime Minister was making much of this yesterday, telling BBC radio: “Looking into 2012 one of the trends I hope to see happen is a fall in the level of inflation” with “households feeling under less pressure than they did in 2011”.

The official CPI measure of inflation peaked at 5.2 per cent in September. Yet inflation was significantly above the Bank of England’s 2 per cent target for the whole of 2011 because of so-called “temporary” factors such as last January’s VAT rise. Why couldn’t this happen again?

It could, and prudently the Bank of England’s latest inflation report warns: “how far and how fast inflation will fall are uncertain”. Yet the omens look good, at least for the early part of the year.

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The impact of the VAT rise will drop out of the rolling inflation calculations this month. Most global commodity prices are on the slide thanks to the slackening in the Chinese economy. We can also count on interest rates staying flat all through 2012, as the Bank of England remains concerned with heading off recession. The markets aren’t pricing in a rate rise till November 2015.

Inflation is headed downwards elsewhere. In the eurozone, it peaked at 3 per cent in November, dropping to 2.8 per cent last month. With the euro countries headed for recession, inflation is predicted to return to the 2 per cent target by mid year. Pessimists are even talking about deflation, so further rate cuts by the European Central Bank could be on the cards. In America, inflation is also over the hump, aided by the downward pressure on energy prices as the US unlocks its vast potential for domestic shale gas.

One fly in the UK ointment would be a rash of wage rises. VocaLink, which provides automated payment systems, tracks wages paid into UK bank accounts. According to the company’s latest data, average take-home pay has ticked up to an annualised 2.6 per cent rise for the three months to September. The problem lies in manufacturing. Since February 2011, pay growth in manufacturing has been accelerating, hitting 4.1 per cent for the quarter to November.

Exchange rates are another volatile factor. Yesterday, sterling hit a 16-month high against the euro, meaning cheaper European wine. However, if US economic growth remains positive in 2012, the pound could weaken against the dollar. That would not be good for import prices of commodities.

The wild card remains oil prices. Fresh US and EU sanctions on Iran, followed by Tehran’s bellicose threat to close the Gulf to shipping, have caused a predictable rise in oil prices this week. Brent futures were above $113 a barrel yesterday.

It remains to be seen how much of this is shadowboxing. Debt-stricken Greece gets a quarter of its oil from Iran, Italy 13 per cent and Spain 10 per cent. All want a delay in sanctions. Equally, Iran’s clapped-out economy is in no position to withstand an embargo. Which may explain why, on Thursday, Iran’s foreign minister let it be known (quietly, via Turkey) that he favoured a resumption of negotiations over Tehran’s nuclear programme.

The Bank of England expects inflation to be back at the 2 per cent target by the third quarter of 2013. But events in the Near East have a way of getting out of hand. And Iran has a huge arsenal of mines.

A Titanic change in prices is obvious

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APRIL 15, 2012 is the centenary of the sinking of the Titanic. When the French deep-sea explorer Paul-Henri Nargeolet first saw the debris surrounding the wreck, he said it looked like a Paris flea market.

Now some 5,000 of the objects that Nargeolet recovered from RMS Titanic are being auctioned off (as a single lot) in New York on 11 April. They are valued at nearly $200 million (£130m).

If you want a handle on how inflation erodes value, consider that the price of a first-class suite on the Titanic was £870, which equates to around £80,000 in today’s money. Even if you’d bunked with Leonardo DiCaprio in steerage, a one-way ticket would have set you back £3, or about £277 in current prices.