UK Inflation

The Bank of England has published its forecast for British economy in the near future.
An important fact to be analyzed is for inflation.
The Bank of England provides a drastic reduction in the UK inflation level for next year. The price index is a familiar argument to us Europeans, accustomed to the almost obsessive search of price stability as the primary objective of monetary policy by the Bundesbank and now by ECB.
In the UK two types of calculating inflation are used. The Government adopts the CPI (Consumer Price Index), which considers a basket of goods including services, electricity, food, transport, etc. But there is also the RPI (Retail Price Index), which considers other items in addition (including, for example, housing costs) and which is used, among other things, as an index for the adjustment of pensions. The baskets are changed annually following the results obtained on the purchasing habits of 6,500 households, a process that leads to the choice of which goods to keep, add or remove from the basket (in 2011 have been added such as smartphones and mobile applications) . The two indices have different values ​​to each other, reflecting their different composition, but both reflect the full price dynamics.
Well, the Bank of England, it supported by many economists and analysts, expected inflation (the CPI in this case) falls from the current 5% to below 2% by the end of 2012. Already, there has been erupting in recent days, with the CPI fell from 5.2% to 5% and the RPI from 5.6% to 5.4% between September and October.
There were three reasons that led the English inflation so high, producing negative effects on real wages (ie the difference between nominal wages and the level of inflation) with a consequent reduction in disposable income, and income from investments ( it is estimated that, on the basis of the low yields on British government bonds, inflation is currently producing a negative real rate of approximately 2.5%):
- High energy costs: as most of the industrialized world, even in the UK more recently we have seen high cost of energy bills;
- Depreciation of the pound: the global financial crisis of 2008 hit England as the financial center of reference for Europe. The exchange rate pound / U.S. dollar, which in November 2007 reached a record level of 2.1161 $ / £ (the highest level in 26 years), has seen the rapid depreciation of the English currency, arrived in January 2009 to rate of 1.35 $ / £ (the lowest in the last 24 years). Similarly, the behavior of the exchange rate pound sterling / euro at the end of March 2009 came to 1.06 euro / sterling (approximately 1.35 was in early 2008). The currency depreciation has consequently led to an increase in the prices of imported goods, a fact particularly burdensome for a country like the United Kingdom with a high trade deficit in goods (in September, for example, increased to 9.81 billion pounds compared to the 8,4 in the previous year);
- Change in VAT:  to counter the recession of 2008 the British Government launched a temporary reduction in VAT from 20% to 15% in December 2008 and then gradually bring it back to 17.5% in January 2010 and 20% in January 2011. Unquestionable in terms of reducing the effects of inflation at the time of reduction (the RPI rose from 4.1% to 3.1% and the CPI by 3% to 0.90%), but undoubtedly the inflationary effects of the restoration higher values.

The forecasts indicate a decline in prices in the UK are based mainly on the income effects of austerity measures, the fall in prices of food (down 0.9% between September and October) and commodity and finally the fact that  VAT increase in January and the sharp increase occurred in the price of oil will not affect more when in 2012 will be calculated the level of inflation over the previous year.
If long-term perspective this should lead to improvements in real disposable incomes, until then tensions remain on families, both as a result of the crisis of the Eurozone and because there will be some time before the real wage increase. In this respect the British Government, in a totally acceptable way, is planning to show their citizens the "carrot" (in the form of increase in personal tax allowances and possible freezing of council tax, the tax that owners and tenants pay all year on the house in which they reside) after the "stick" of austerity measures; and the Labor Party, as expressed in the Congress last month by its leader Miliband, wants to reintroduce a temporary reduction in VAT (in contrast with the different measures introduced in Italy).