Tuesday, November 18, 2008

Fall in Inflation and Rise in Prices

Source: ONS

The ONS reported a significant drop in the inflation rate from 5.2% to 4.5% in October. This is the biggest drop in the inflation rate since April 1992. This means prices are now rising by 4.5% a year.

I noticed one comment about this statistic which is quite common:
"Inflation isn't falling ! It is rising at more than double the governments target. Things are still rising in price by 4.5% !!!!"
A fall in the inflation rate means that prices are increasing at a slower rate. Yes, prices are still rising, but, there has been a fall in the rate of inflation. - prices are increasing at a slower rate.
  • This inflation figure is what we might can a backward looking statistic. If we look at producer price inflation. Prices are actually falling.
  • Producer inflation was -1.0% in October. [Bloomberg] This is the biggest drop in producer prices since records began in 1986.
  • This producer price deflation is a guide to inflation next year. It suggests why inflation is in danger of undershooting the government's target of 1%.
  • Definition of Producer inflation Producer inflation reports the price of goods leaving the factory gate. If the price of manufactured goods are falling, in due course, retail shops will be able to pass these lower prices onto consumers.
  • The fall in inflation increases the chance of another rate cut in December.

1 comment:

Robert said...

The use of year on year changes in standard index numbers as a measure of inflation can be very misleading whenever the inflation trend changes (e.g. UK October 2008). If there is a large(ish) rise in the index over a 12 month period, then even if prices steadily FALL for several months the year on year may be positive. Apparently that is inflation (if the year on year change is taken to mean the rate of inflation). Imagine a steady rate of increase 0.5% per month for 12 months giving 6% over the year, followed by a steady decline in the index at 0.25% per month. The index would show a year on year increase until the end of the 8th month of the 2nd year. At that time it would be zero. Truth would be deflation at 3% p.a. Unfortunately, the BBC do not seem to understand and so misinform millions of people every month.