Saturday, January 03, 2009

Inflation no longer exists

Samuel Brittan makes a good point in the FT:

Inflation has now turned down with a vengeance and if we could free ourselves from the bondage of 12-monthly comparisons we would see that it no longer exists.

This graph shows how right he is. The blue line is the headline CPI inflation figure, giving price changes from 12 months earlier; the only reason it was still above 4% in November is the legacy of the surge earlier in the year. If you look at price changes over six months (green line) and especially three months (red), you can see that that when the earlier price rises have dropped out of the figures, inflation is plummeting towards zero.

(I’ve given annualised equivalents for the six- and three-month figures for ease of comparison. Calculated from ONS figures.)

The three-month line certainly went negative in December: even if we assume the price level then was unchanged from November, that would give a three-month fall of 1.4%. In fact, there’s been some very hefty discounting (not to mention the VAT cut and the fact that demand is falling).

Given that deflation is charging at us, the fall in the pound is a blessing.

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