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Figuring out inflation

Jeegar Kakkad October 13, 2009 11:37

Today's inflation figures show just how hard it is to be an economist these days.

Annnual CPI inflation fell to 1.1%, down from 1.6% in August. The low inflation rate came as a surprise to many economists: the consensus forecast was 1.3%, we expected 1.2%.

Not a huge difference, you say. But most economists had come to accept that prices were sticky (they generally don't change much, either way. So it took a huge rise in commodity prices to push prices up in 2007-08, and a worse-recession-in-sixty-years downturn to raise concerns about inflation rates below 1%).

But the funny thing is, that while the 1.1% rate in September was below what most economists expected, it is above what the Bank of England expected (which is currently pumping billions in to the economy through its quantitative easing programme). So the brightest in the City and the Old Lady's finest both got it wrong, but in opposite directions.

Leaving aside any discussion on the state of economics as a profession, September's inflation figures point to one essential fact: still in flux, the economy is far from a stable and sustained recovery.

Output levels remain siginficantly depressed, hence the BoE's assessment that the output gap is large and so inflation rates should be falling.

Some parts of the economy (some service sectors, parts of manufacturing) are posting moderate rebounds from their very low levels. Coupled with strong stock markets and recovery elsewhere, many economists expect a v-shaped recovery (that in turn gives credence to the ideas that prices are sticky.

More data in the next couple weeks - labour market stats, the q3 GDP figure, business investment numbers and the October PMIs - are just as likely to point to recovery as to continued stagnation.

But this uncertainty is what keeps economists employed and interested (if not consistently wrong).

 

 

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