Is Ritchie numerate?

From his blog comments:

And there is not a hint of inflation, at all

From the BBC:

Inflation fell sharply in December on the back of lower fuel and clothing prices.

Consumer Prices Index (CPI) inflation in the UK fell to 4.2% in December, down from 4.8% in November, according to the Office for National Statistics (ONS).

Retail Prices Index (RPI) inflation – including mortgage interest payments – fell to 4.8% from 5.2%.

Some of us consider 5% to be more than just a hint of inflation. But then that would be being both numerate and observant, wouldn\’t it?

18 comments on “Is Ritchie numerate?

  1. I remember my father searching for a better-paid job when inflation topped 4%. Mind you, that was in 1959.

  2. Perhaps the favoured retired accountant from Wandsworth is confusing the rate of change of inflation, with the actual rate of inflation.

    Not that I’d actually be churlish enough to actually accuse him of doing so deliberately of course.

  3. I think that was a response to a comment regarding BofE pensions inflation outlook.

    I have to admit I did follow Murphy’s blog for a while but his utter disregard for any opinion that even dares question his and his liberal use of the delete button I found rather off-putting to say the least.

  4. The price of a lot of things went up by 2.1% or so last January because of the VAT increase. Inflation will fall significantly when that drops out.

    Inflation isn’t zero, but you wouldn’t want it to be.

  5. 5% inflation is the rate which causes prices to double in 14 years.

    Or, to put it another way, for your fixed income to halve in 14 years.

    Or, to put it another way, for the government’s debts to halve in 14 years.

  6. “Inflation isn’t zero, but you wouldn’t want it to be.”

    You speak for yourself!

    Prices were (more or less) the same in 1900 as 1600, I believe.
    Plenty of progress over that period.

  7. KJ

    Murphy, higher up the same comments stream, in response to a comment about cost-push inflation arising from QE-driven devaluation of Sterling:

    “Where is this inflation?

    There is a risk of deflation, but not inflation”

    So no, it isn’t just to do with BoE staff pensions. He is denying that inflation exists.

    I have pointed out to him – several times in different forums – that inflation and deflation are not mutually exclusive, that as QE debases the currency it can create CPI inflation due to higher import prices even when there is domestic deflation due to private sector deleveraging. His response to this was to deny that devaluation of sterling had anything to do with QE.

    Total denial.

  8. In so far as prices in 1900 were similar to prices in 1600 it’s not because the inflation rate was about zero in between. It’s because of alternating periods of inflation and deflation.

  9. Compounded up over only a few years, an annual inflation rate of 5 per cent will cut your initial capital into shreds. I wonder if Wandsworth’s most distinguished accountant can work that out.

    I suspect he does not care. Murphy is a fanatic, a joke and a brazen liar.

  10. “It’s because of alternating periods of inflation and deflation.”

    Indeed so.

    What a shame the last hundred years seem to have missed out on the latter.

  11. Frances, I’ll take issue.

    The big 25% sterling devaluation occurred in late 2008. QE started in March ’09. Sterling strengthened after QE started.

    Unless you use “inflation” and “deflation” to refer to something other than the movement of the price level, it is meaningless to say you can have both. Yes, some prices may move up and some may move down, but that is always true; the price level is an aggregate of all prices.

    Inflation/deflation are used to describe the movement in that aggregate.

    I’ll also agree with the Murph that there is currently little indication that inflation will remain high, market inflation expectations say exactly that.

    The quarterly GDP deflator (SAAR) was below 2% in 2011 Q2 and Q3 so I’d also say the UK economy as a whole has not been seeing much inflation.

  12. JAT

    Yes, true, sterling did weaken against USD before QE and strengthen a bit after it started. And the present round of QE doesn’t seem to be making much difference to sterling. I stand corrected. But in theory QE should devalue the currency. If it doesn’t there must be other factors at work.

    On the inflation vs deflation thing. The problem is that we use the same terms to mean both changes in the money supply and changes in the overall price level, but these are only equivalent in a closed economy. The CPI can rise when the money supply is falling if people are cutting discretionary spending in order to accommodate price rises in essential imported goods and pay down debt. Under these circumstances the domestic environment is deflationary but there is CPI inflation. We could of course stop using the term deflation to mean falling money supply?

  13. @Frances Coppola:

    “I stand corrected. But in theory QE should devalue the currency. If it doesn’t there must be other factors at work. “

    I suspect that this is because the new money that is being created via QE is being hoarded by the banks and not released into the economy at large.

    If we can get into a position where, once the current economic issues are dealt with this QE’d money is prevented from escaping into the wider economy then we won’t necessarily see much inflation arising.

    However, if it does escape into the wider economy we will. Ultimately, QE is just a more sophisticated way of turning on the printing presses while retaining a certain amount of control.

    I’m not a fan of currency debasement, but given the nature of our present economy, it is probably preferable to contraction and depression.

  14. Why isn’t QE causing the currency to devalue?

    Two things come to mind:

    1) Perhaps because other governments are doing QE as well, so the currencies we’re measuring against are also devaluing.

    Although possibly not – looking at the sterling to Swiss franc graph, that seems to show much the same thing.

    2) Markets look forward (more than politicians do, anyway), and so the currency drop happens a couple of quarters before the QE. Basically the markets see that things are going tits-up, the currency devalues at that point, but it takes the politicians 6 months to actually do anything about it.

    If (2) is correct then you’d actually expect a slight recovery when the politicians actually do something, because when the currency fell the market would have priced in the risk that they wouldn’t.

  15. Looking at the Swiss franc graph:

    1) The exchange rate bobs along gently for about 5 years, until August 2007.

    2) In August 2007 it falls of a cliff, and stays in freefall until January 2009, all through the bail-outs.
    That’s the period when we all knew it was going tits-up, but the politicians were pretending it was all under control. Not surprisingly the markets react to the reality, not the politicians’ claims.

    3) February/March 2009, the pound starts slowly climbing back, regaining about a quarter of its previous losses.
    That’s when Darling admits that we’re in deep doodahs, and the BoE announces modest (£50bn) QE. Let’s say that’s the relief that the politicians are doing something but not doing anything too huge, and perhaps we’re out of the worst.

    4) August 2009 the BoE announces that QE is to be extended to £175bn, and the pound collapses again, rapidly wiping out the gains in early 2009 and falling even further.
    That’s when the market thinks they’re going too far, and risking serious inflation.

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