{"id":2881,"date":"2009-10-13T10:00:00","date_gmt":"2009-10-13T10:00:00","guid":{"rendered":"https:\/\/mmm.9dotdigital.ca\/?p=2881"},"modified":"2025-03-27T15:48:55","modified_gmt":"2025-03-27T15:48:55","slug":"uk-inflation-drop-no-reason-to-expand-qe","status":"publish","type":"post","link":"https:\/\/mmm.9dotdigital.ca\/?p=2881","title":{"rendered":"UK inflation drop no reason to expand QE"},"content":{"rendered":"

The fall in annual CPI inflation to 1.1% in September reflected energy base effects and lower food prices and was in line with a forecast presented in an earlier post<\/a>. Inflation is likely to climb sharply over the next few months, with a risk that it breaches 3% in January, necessitating an explanatory letter from Bank of England Governor King to the Chancellor <\/p>\n

At the August Inflation Report<\/em> press conference, Mr King stated that it was “more likely than not” that he would have to write a letter explaining an undershoot of 1% later in 2009. Because of the favourable energy base effect, any such shortfall was expected to occur in September. With the odds in favour of a rebound in October and beyond, an undershoot letter is now unlikely.<\/p>\n

Despite the fall in September, inflation averaged 1.5% in the third quarter, comfortably above the Bank’s forecast of 1.3% made just two months ago. Coupled with the recent plunge in the exchange rate, this should lead the Bank to revise up its near-term projections once again in the November Inflation Report<\/em>. It currently forecasts average inflation of 1.3% and 2.1% in the fourth and first quarters.<\/p>\n

While the 1.1% September outturn is well below the 2% target, the shortfall is entirely explained by lower energy costs and last December’s VAT reduction. Core CPI inflation – excluding energy, food, alcohol and tobacoo – was 1.7% last month and would probably stand at 2.3-2.4% in the absence of the VAT change (based on official estimates of its impact).<\/p>\n

The Bank, like the consensus, thought CPI inflation would fall by much more than it has this year – the May Inflation Report<\/em> projected a drop to just 0.4% in the fourth quarter. Forecasting models gave too little weight to the impact of sterling’s decline while placing overreliance on highly-uncertain estimates of the “output gap” and its influence on pricing decisions. (These issues were discussed in a post<\/a> in March.)<\/p>\n

With CPI inflation overshooting its projections, and the core VAT-adjusted rate above the 2% target, today’s numbers do not warrant a further expansion of the Bank’s quantitative easing programme next month. As argued in a post<\/a> last week, there is evidence that the Bank’s gilt-buying is creating excess liquidity in the economy and a further monetary injection could lead to an accelerating decline in the currency.<\/p>\n","protected":false},"excerpt":{"rendered":"

The fall in annual CPI inflation to 1.1% in September reflected energy base effects and lower food prices and was in line with a forecast presented in an earlier post. Inflation is likely to climb sharply over the next few months, with a risk that it breaches 3% in January, necessitating an explanatory letter from […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-2881","post","type-post","status-publish","format-standard","hentry","category-money-moves-markets"],"_links":{"self":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2881","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=2881"}],"version-history":[{"count":1,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2881\/revisions"}],"predecessor-version":[{"id":5190,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=\/wp\/v2\/posts\/2881\/revisions\/5190"}],"wp:attachment":[{"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=2881"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=2881"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mmm.9dotdigital.ca\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=2881"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}