Tuesday, January 19, 2010

VAT and inflation

Inflation has jumped. And it’s jumped quite a lot for one month.

Those lovable monetarist scamps at the Spectator blog are creaming themselves. The ever-excitable Fraser Nelson is perhaps too busy changing his trousers to have posted about it yet, but in the meantime his colleague David Blackburn tells us:

We are now seeing the long-term effects of Quantitative Easing and the use of debt to finance further government borrowing.

Well, not exactly. What we’re now seeing is the short-term effects of a tax cut that lasted for 13 months. As you’d expect, after 12 months the effect of this cut disappears from the annual rate of inflation.

Let’s have some numbers.

The 12-month change in the Retail Price Index dropped from 3.0% in November 2008 to 0.9% in December 2008, the month when the VAT cut came in. Now that the start of the cut has fallen out of the 12-month figures, the RPI has reversed this drop: it rose from 0.3% in November 2009 to 2.4% in December 2009. So a 2.1% fall was followed, a year later, by a 2.1% rise.

As for the RPI-X measure of inflation (excluding mortgage interest payments), it fell from 3.9% to 2.8% a year ago and has now risen from 2.7% to 3.8% (down 1.1%, then up 1.1%).

And the CPI measure, which is the Bank of England’s target, dropped a year ago from 4.1% to 3.1%; it’s just risen from 1.9% to 2.9% (down 1%, then up 1%).

The similarity of the pairs of numbers is partly a coincidence, of course – many factors affect inflation. The Beeb’s Stephanie Flanders reports:

All told, Capital Economics calculates that about three-quarters of the headline rise in the CPI from 1.9% in November to 2.9% in December is due to the "level" effect of last year's VAT cut. The fact that oil prices were falling sharply at the end of 2008 had an impact as well.
It's not over yet. We can expect the rise back to 17.5% in January to push the headline rate up even higher, perhaps to 3.5% or more, before falling back.


Tom said...

One more coincidence: a 2.1% fall as we saw in the RPI is also the effect of a cut of 2.5 percentage points in VAT on the price of a good. (Something priced at £100 before the VAT cut would have cost £85.10 plus £14.90 VAT; after the cut this would have been £85.10 plus £12.77 VAT, for a grand price of £97.87).

Yeah? said...

One thing for certain. We haven't seen the even a hint of the deflation the elites have been banging on about, not that they were looking for any excuse to monetise the governments debt and bailout the bankrupt high finance parasites or anything...