UK Inflation Figures Make A Mockery Of The Economic Assumptions Of Old

News emerged last week that during August, UK inflation went up. Again. The consumer price index (CPI) index last month showed that prices were 4.5pc higher than the same month in 2010.












It is noteworthy, also, that UK construction orders plunged 16pc during the second quarter – to their lowest level since 1980. So the outlook for construction is now worse, even, than during the "credit crunch" proper.

Given the growing sense that a tumultuous "euro-quake" end-game may soon be upon us, or at least the still traumatic acknowledgement of an explicit Greek default, the newsflow from Europe last week was almost overwhelming. So there was, perhaps, less comment than there should have been on the fact that UK inflation had just equalled its three-year high.

It used to be reasonable to assume that when the economy slowed, and unemployment rose, then inflation was likely to fall. Well, the UK has just endured its worst recession in more than 60 years. The economy shrank, peak to trough, by more than 6pc. Despite this historic drop, growth has failed to bounce back, remaining as low as 0.2pc during the second quarter.

Yet still, price pressures have been rising. Not so long ago, the publication of data showing that CPI inflation had overshot the Bank of England's 2pc target by more than 1 percentage point would have dominated the news agenda. The Bank's resulting public letter to the Chancellor, triggered by the 3pc breach and designed to explain the divergence, would have been forensically analysed by the commentariat. Such letters are now so common that hardly anyone reads them.

Over the past three years, monthly CPI growth has averaged – yes, averaged – 3.3pc. Those of us who've raised objections, pointing out that this might become a problem, have been dubbed "inflation nutters". It's as if the British economics profession has contracted collective amnesia, immune to the lessons of history, failing to highlight the danger that inflation in the 4pc to 5pc range can very quickly spiral out of control, as high and self-fulfilling inflation expectations become entrenched.

The UK's economic outlook weakened markedly in August. Survey data suggest the risk of the British economy re-entering recession, the dreaded "double-dip", has grown considerably. All three of the main CIPS survey measures fell last month, the main services index dropping at its fastest rate for 10 years.

It is noteworthy, also, that UK construction orders plunged 16pc during the second quarter – to their lowest level since 1980. So the outlook for construction is now worse, even, than during the "credit crunch" proper. This matters not only because the sector accounts for a chunky 7pc of the UK economy and employs millions of people. Construction is also a reliable "bellwether", with trends in the industry often pointing to what the economic future holds.

It looks likely, then, that we'll see virtually no growth in Britain for the rest of this year, even if global financial markets avoid meltdown.

It's also likely, though, that inflation will keep rising from 4.5pc over the coming months, above 5pc and beyond. The old retail prices index (RPI), more realistic than the CPI that replaced it, is already at 5.2pc. Such inflation numbers, amid a ghastly slowdown, make of mockery of the usual economic assumptions.

A big reason still higher UK inflation looks inevitable in the coming months is the price of energy and other commodities. Utility bills are soaring, as are UK food prices – which rose 6.2pc during the year to August. These miserable outcomes have their origins in the fact that global energy prices, to the surprise of many, have remained remarkably firm despite the latest Western slowdown. As such, another economic assumption of old has been upended.

Until recently, a slump in the "advanced countries", most of which are oil importers, was enough to generate a fall – expected, actual or both – in world oil prices, due to the impact of weaker Western energy demand. This was very useful for the developed world because the lower oil prices that resulted when our economies slowed helped to bring about our recovery. Cheaper fuel and heat would cut household and industry costs, boosting disposable incomes, profits and growth itself. Lower oil prices also helped tame inflation, giving our central banks the room to cut rates, so consolidating recovery.

Global oil markets, then, have long provided a crucial "self-correction" mechanism for the Western world. In light of the cardinal importance weaker crude prices have played in bringing about previous Western recoveries, it's worth examining their recent path.

Last month, amid fears relating to Europe's banks and Western sovereign debts, financial markets obviously took a big hit. The S&P 500 index of US stocks gave up all its 2011 gains, ending August 4pc down since the start of the year. Analysts slashed their growth forecasts for the US, the UK and mainland Europe. Yet, incredibly, the price of oil, while it has oscillated, has stayed pretty much where it was. Brent Crude remains up more than 21pc since the start of 2011, averaging no less than $112 (£71)/barrel so far this year.

Why is this happening? Typically, signs that the West is slowing, on cue, bring oil prices down too. But the markets now judge that the fundamentals suggest crude prices should stay roughly where they are, even if the West is struggling, not least because the bulk of oil demand in the world now derives from elsewhere.

The non-Western world today accounts for 55pc of global oil use. The insatiable energy appetite of China, India and the other large emerging economies – most of which are still growing by pc to 8pc – means they now set the tone on world commodity markets. The numbers are truly incredible.

The US Energy Information Agency (EIA )has just released estimates that the world will use 88.2m barrels of oil daily during 2011 – an all-time high, despite sluggish Western growth. As the emerging markets have expanded, engaging in massive infrastructure building, while their huge populations have become richer and adopted more energy-intensive lifestyles, global oil use has risen no less than 15pc over the past 10 years.

The EIA forecasts oil demand of 99m barrels daily by 2015, another 15pc rise from today, but this time in five years. Even in 2009, when the world economy contracted, world oil demand fell just 2pc, then grew 4pc the following year. So the oil market's long-held assumption of "demand destruction" when Europe or America slumps, is now being seriously tested.

The supply-side of the oil market also looks tight. The credit-crunch cut investment in exploration and well-development. The EIA sees a short-term deficit of 1.4m barrels per day in the fourth quarter of this year. Looking forward, oil traders are now showing a lot more interest in rapid depletion and falling yields at Ghawar, Cantarell and the world's other giants fields.

The politics of Opec have also recently been turned upside-down. Just a few years ago, Saudi Arabia made sure the exporters' cartel targeted $25 a barrel, so as to keep the Western world buoyant and oil demand strong. But now the Middle East can sell crude, as fast as it can pump it, to the emerging giants of the East. Meanwhile, the "Arab Spring", and resulting social expenditures to placate restive populations, mean that Saudi, and other oil exporters in the Gulf, need oil above $100 just to balance their budgets.

Like so much in economics these days, our usual assumptions about the oil market, in place for decades and reassuring for the West, are being revised before our eyes. The implications of these revisions we'll ultimately find impossible to ignore, even if so many continue to dismiss the inflationary dangers we face.

The Liberal Democrats Aren’t Especially Liberal – Or Even Democratic

The junior Coalition partner’s policies have made a mockery of its historic name.












What is Sarah Teather's party actually delivering for Britain?

If the Liberal Democrats didn’t exist, under what circumstances would you choose to create them? I’ll assume that it’s the “Liberal” bit of their historical accident of a name that matters (not many anti-democrats run for election these days). If we did feel the need for a Liberal Party, I guess it would be because neither the Labour nor Tory organisations were being sufficiently, well, liberal in their policy-making.

Ten years of Tony Blair and Gordon Brown making illegal anything that moved, while repeatedly trying to give the state the power to lock us up without charge for longer and longer periods? Yes, I can see a need for some more liberalism; that there could be a useful role for a party to react viscerally against Labour’s criminalising tendencies. Ten years of Margaret Thatcher? I’m hardly one to criticise my political hero, but I can’t deny that prolonged exposure to her governing style might make a voter yearn for something a little less prescriptive; a little more laissez-faire in matters social. Regardless of your own political disposition, then, I don’t think it’s hard to make the case that political space could exist for a party which prioritised the autonomy of the individual over either stateist or corporatist collectivism.

Now imagine that you are a Liberal Democrat. Your organisation has been in the wilderness for 80 years, since the time of Lloyd George. The general election of 2010 gives you the chance to share government with the Conservatives; this is the first time in recent history that an administration will have a serious Liberal presence. How would you behave? Me, I would be bending over backwards to demonstrate that not only is a liberal instinct a useful one to bring to the art of government, but that it also makes sense to have that instinct embodied by my organisation. Anyone anyone can call themselves a “liberal”. The trick is to convince voters that such an instinct requires a party to carry it.

Instead, what has happened? Andrew Lansley’s Health Bill, which made a tentative step towards liberalisation of health provision in the UK, is first of all postponed, and then watered down, largely at the behest of the Lib Dems. Even after the Bill passed the Commons this week, Baroness (Shirley) Williams and the dis-elected ex-MP Evan Harris continued to mutter darkly and publicly about their inability to support it. Lib Dems ensured that the planned GP consortia – supposed to act for us, the patients – will include hospital doctors and nurses; a prioritisation of the producer over the patient. Unelected peer and dis-elected ex‑MP – I withdraw my opening remarks about the party’s name: they’re not even democratic, let alone liberal.

Also this week, Nick Clegg gave a speech about the Coalition’s flagship free schools. These schools are the last, best hope of those children failed by local education authorities. Academic excellence through freedom of choice: what could be more liberal than that? Instead, Mr Clegg chose to focus on the importance of preventing anyone running such a school from making a profit – profit is bad, apparently, because successful schools might use the money to expand – and went out of his way to support an even greater role for councils – the LEAs – in controlling access. In a straight choice, the Lib Dem leader prioritises the producer interest.

I could go on. Lib Dems also want to delay the election of local police commissioners. Anti-democratic again; and when was denying a voice to the people a “liberal” characteristic? And I’ve not mentioned the party’s support for the Human Rights Act, largely because it defies parody, let alone analysis. “Votes for prisoners”, say Lib Dems. It’s not quite the heady fight of the People’s Budget of 1909, is it?

Ah yes, say Lib Dem activists, but think of all the good we bring to the Coalition. When pressed, they trumpet the lack of recognition of marriage in the tax system. I’m not clear why it’s liberal to penalise the natural pair-bonding affinity of human mammals, but there you are. They also claim to have secured the increase in the personal allowance for the poorest taxpayers, as well as the retention – thus far – of the 50p top rate.

The 50p top rate is economically illiterate, and needn’t detain us. Symbolism does matter, though, and if keeping it there for a few months longer means that those such as Simon Hughes (“Champion of University Access”, no less) continue to vote with the Government, so be it. But did we need the Lib Dems to make the case for the increase in personal allowances? Tories have campaigned against the complex and inefficient recycling of income from the poor, to the government, and then back to the poor, for years. More importantly, the Right-wing view of tax (to reduce it wherever possible) is truly liberal, because it seeks to free people from state dependency. Lib Dems view tax as an instrument of social engineering; hence the posturing over 50p.

Eighty years in the wilderness, 80 years protecting the flame, and they can’t even mount a coherent case for electoral reform (“AV is a miserable little compromise” – Nick Clegg. But then: “Vote for AV” – Nick Clegg). Measured as the opportunity to show that British liberalism deserves the vehicle of its own party, coalition has been a disaster for the Lib Dems.

We have to face up to this political category error. Just because we can all agree that there’s a need for some liberalism in our politics, just because some unpopular politicians have given themselves that name, we’ve taken the Liberal Democrats at their own valuation. But Shirley Williams and Evan Harris are not liberals, and nor are the other former leaders and big Lib Dem beasts who haunt the media airwaves with a greater prominence than the paucity of their electoral support could ever justify.

Not that a political position has to be popular in order to be worth holding; and if a party wants to act as a pressure group for the producer interest in health and education, or as a supporter of judicial activism on Human Rights, or to call for ever-greater European integration (as Danny Alexander did this week), then good luck to it. But it shouldn’t mis-name itself.

Where the Lib Dems have been politically effective in the Coalition, they have been anything but liberal. And when they claim to be liberal, they are merely copying policy which the larger party would implement anyway. Neither tactic makes them a worthwhile coalition partner for a Conservative; worse, from the Lib Dem point of view, neither tactic has demonstrated that the 80 years without them were a political loss for Britain. If the Liberal Democrats didn’t already exist, to answer my opening question, I suspect that few would contemplate breathing life into the politically unattractive, social democratic clay from which they are fashioned. We already have a party to represent the sectional producer interest. It’s called “Labour”.