Wednesday, February 16, 2011

UK Inflation Up, UK Unemployment UP—UK Interest Rates Flat

We have worries of the UK: Inflation is up, unemployment is up, and Mervyn King just announced that interest rates will remain steady.

About UK unemployment, Bloomberg is reporting this morning:
U.K. unemployment claims unexpectedly rose in January, underlining the fragility of the labor market a year after the economy emerged from recession and as public-spending cuts start in earnest.
The number of people receiving jobless benefits rose 2,400 to 1.46 million, the Office for National Statistics in London said today. The median of 25 forecasts in a Bloomberg News survey was for a drop of 3,000. Unemployment based on International Labour Organization methods rose by 44,000 in the fourth quarter to 2.49 million.
Meanwhile, about UK inflation and interest rates, the Telegraph is reporting:
[Governor of the Bank of England] Mervyn King repeated his warning that the government's measure of how fast prices are rising, the consumer prices index (CPI), could hit 5pc "over the next few months", after figures showed it climbed 4pc in the year to January.
Nontheless, the UK's foremost central banker said the Bank's Monetary Policy Committee (MPC) thinks that trying to bring inflation back to the 2pc target quickly risks "undesirable volatility in output". A hit to growth could even see the target undershot in the future, he said.
Mr King continued to blame the over-target inflation on "temporary effects", citing the increase in VAT to 20pc at the start of the month, the fall in the pound and soaring commodity prices.
However, he warned: "There is a great deal of uncertainty about the medium-term outlook for inflation. And I do not wish to conceal that there are real differences of view within the Committee, reflecting different judgements about the risks to that outlook."
If January’s CPI was 4%, then the notion that it’ll hit an annualized rate of 5% “in the next few months” is absurd—inflation will hit 5% over the next couple of months at the latest. All commodity prices are surging, and there is nothing stopping it right now. 

Coupled with surging unemployment, this all spells doom for the pound sterling unless Mervy the Swervy doesn’t get out ahead of inflation and reign it in—hard. 

Problem is, the BOE can’t: The UK’s government is over-indebted, product of the spend-and-borrow Labour governments. If Mervy raises rates, to stop inflation, he might shove Britain into a sovereing debt crisis. 

Mervy is trying to spin this as “no one is sure if this inflation is the real thing or a passing thing”—but all signs point to it being the real thing. Yet Mervy the Swervy ain’t doin’ a damn’d thing about it: Steady-as-she-goes interest rates is his answer, which will only feed the inflation beast. 

So bottom line, it looks like the UK is heading into stagflation, with the Bank of England at best chasing after inflation reactively, like it did in the 1970’s, instead of getting out ahead of it and stopping it cold. 

So advice? Get out of gilts, get out of the pound, or best of all, get into pound debt at a fixed rate. Goes that ship’s going down. 


  1. Seems like government austerity isn't really working out for them in Britain. Let's try it here in the US and hope for a different result.

  2. High GL, as usual well put. I think what the western world is facing is something for more dangerous than mere stagflation though.

    What will happen when Ireland begins talking about haircuts for UK investors??

  3. I have shared here that I participate in a national grass roots effort to track inflation on family essentials and gas. The annualized rate of inflation for family essentials and gas for the 12 weeks ended February 2, 2010 is a goat-choking 13.9%


    K Smith

  4. Goats don't usually choke too well. Our always died.

    Shocking how inflation numbers are polished, painted and repackaged. Good job grassroots inflation gal.

    Nice to find hourly G up and going ok. Not sure where I have been. (yes, still in Kansas)

  5. Did the Sunday G-Tutuorial take a nap?


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