Inflation is falling – but not thanks to the Bank of England or government policy

Posted on February 15 2023

As I predicted, the Office for National Statistics has confirmed this morning that the rate of inflation in the UK is falling:


The decrease in January was 0.4%.. That is modest, but the fact that it was a decline is exactly what I expected.

What I stress is that this decline has nothing whatsoever to do with any government policy, or any policy of the Bank of England. All the UK's inflation indices are calculated by comparing the price of a bundle of goods in the current month with the equivalent bundle of goods 12 months previously. There is nothing more sophisticated to the process than that.

In that case, the only questions that needs to be asked about why the rate of inflation has changed is about what has happened to change the macroeconomic situation between those two periods that are 12 months apart.

In the case of January 2023, the comparison that is being made is between prices that are being inflated as the consequences of the war in Ukraine and prices that had already been inflated by the consequences of the supply chain difficulties that followed the reopening from the Covid crisis.

By January 2022 the Covid supply chain price increases were already beginning to work their way through the system. That was a short-term supply shock. But, because that increase had by then taken place it was inevitable that impact of the price increases resulting from the war in Ukraine would already begin to be muted within the data by now and that is all that we are seeing.

This decline has nothing to do with increasing interest rates. Nor has it in anyway been affected by the government's policy that is punishing public sector workers. It is simply the consequence of straightforward maths and changes in the macroeconomic environment that have taken place outside the UK.

What is more, from next month we should begin to see bigger falls in the rate of inflation as the impact of the war in Ukraine begins to diminish with regard to the calculation of this index. The government will try to claim that these will be the result of their policy measures. To be blunt, they will be lying. Nothing that they have done could have produced a fall in the inflation rate in the periods in question.

Two suggestions follow from that. The first is that the government learn a little humility about this issue. The second is that it abandon its  totally pointless policy of crashing public sector pay that is making the UK's economic position very much worse than it need be, and is at the same time destroying our public services.

 

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12 Responses

  1. Pilgrim Slight Return says:
    February 15 2023 at 7:33 am

    This needs repeating over and over again as long as it remains the case.

  2. Andrew Broadbent says:
    February 15 2023 at 10:18 am

    The BBC show no sign of querying the govt’s claim that ‘they’ and/or the BoE interest rate increases are getting inflation down. That’s the only comment/ query that needs making – until it finally gets through to Joe Public.

    Labour are not mounting a forceful challenge either – but then they are just feeble.

  3. Leigh Bowden says:
    February 15 2023 at 11:37 am

    I think the shock will be that low/no inflation will not be a return to the original lower prices – people will be in for a rude awakening,

  4. John Griffin says:
    February 15 2023 at 2:29 pm

    Having listened to a BBC lunchtime news where at least two direct lies were presented as news, there really is no hope there for any truth-telling there.
    We are now living in a post-Labour era, where the former democratic socialist party is neither any more, and the UK is rapidly moving towards an American Overton window with all policy differences mere window dressing. Labour is no more going to tell the economic or any other truth than the Tories (don’t get me started on the LibDems or the Greens).
    I – and many other – are in despair about the future of the UK for my grandkids, not least the rapid degradation of the physical environment, let alone the economic, and the future costs for health and welfare.

  5. CLIVE PARRY says:
    February 17 2023 at 10:08 am

    Just seen the ONS release some trade data for 2022. Our “Fuel Balance of Payments” in 2022 was about £36bn worse than 2021. This number tells us, as a nation, what higher fuel prices are costing us.
    Domestic consumption represents about 1/3 of energy use….. so about £12bn of the increase…. spread over the 24mm households in the UK gives us £500 per household.
    Now think about what households are actually spending. Anything over and above £500 per household is “internal UK redistribution”. Now, I won’t blame the government for global fuel prices – but I do blame them for the massive redistribution away from the poorest consumers within the UK that IS in their gift.
    PS
    I accept these are “back of an envelope” calculations…. but they do make a point, I think.
    PPS
    Was not sure which post to attach this comment to…… but this seemed the right spot.