Consumer Inflation Down To 2% Target

The CPI grew by 2% in the year to December, down from 2.1% in November, due mainly to contributions from the food and non-alcoholic beverages sector and recreational goods and services. Inflationary increases in motor fuels partly offset the downward pressures. Price increases for gas and electricity over the year were slightly more than last year resulting in an upward contribution to inflation. The Bank of England had set a target of 2% for inflation for stability. It is the first time that the CPI has been at 2% since November 2009 (1.9%).

The three main contributors to inflation in recent years have been food and non-alcoholic beverages, housing, water, electricity, gas and other fuels and transport (incl. other fuels). These sectors combined have accounted for more than half of the inflation rate for each month.

CPI Inflation Up 2.7%

The CPI annual inflation for November 2012 was 2.7%, the same as in October. The index sttod at 124.4 (2005=100). The index was unchanged over all but there were significant changes both upward and downward within the CPI between October and November.

The most significant upward pressure to annual inflation came from food and non-alcoholic beverages, mainly bread, cereals and vegetables and housing and household services mainly gas and electricity. The main downward pressure came from motor fuel and furniture, household equipment and maintenance.

The RPI annual inflation stands at 245.6 in November or 3%, down from 3.2% in October. Motoring expenditure, household and household goods provided the main downward pressure. The main upward pressure came from food.

The CPI measures the changes in the general level of prices for goods and services bought for household consumption. It can be seen as a shopping basket of many different goods and services bought by households. The CPI is the main measure of consumer price inflation for macro-economic purposes. It is used as the basis for the Government's target for inflation that the Bank of England has to achieve. It is also used for the indexation of benefits, tax credits and public service pensions. It is known internationally as the Harmonised Index of Consumer Prices (HICP). HICPs are calculated in each Member State of the European Union. They are used to compare inflation rates across the EU.

The RPI is the longest standing measure of inflation in the UK and historically was used in the indexation of various prices and incomes, the uprating of pensions, state benefits and index-linked gilts and the valorisation of excise duties. Since April 2011 the CPI has been used for some of the previous uses of the RPI as mentioned above.

Some of the main differences between the CPI and the RPI include the population base, item coverage, index methodology and item coding. The CPI population base includes all private and institutional households and foreign visitors. The RPI only includes private households and excludes the highest income households and pensioner households (c.13% of household expenditure). The CPI excludes certain items related to housing costs like mortgage interest payments, house depreciation and council tax that are included in the RPI. The RPI uses the arithmetic mean, the CPI uses the geometric mean. The CPI uses a standard internatikonal classification scheme and the RPI uses a system unique to itself.

Fall In Successful Loan Applications

There has been a decline in the percentage of success rates of businesses applying for loans from banks. In 2007 90% of loan applications to banks were successful but in 2010 there was a fall to 65% of successful loan applications. The percentage of SMEs looking for finance increased from 35% in 2007 to 42% in 2010. A majority of three quarters of businesses went to banks when looking for loans and five out of six businesses expect to apply to banks when looking for loans in future.

The main reason for refusal of loan finance was given as a lack of collateral or a lack of own capital. Poor credit rating became the most notable reason among other lenders in 2010 whereas in 2007 reasons were more sparse. In the few cases where the failure to get finance was becuase of a refusal on the part of the applicant high interest rates were less of a problem in 2010 than in 2007. This is partly due to the fact that in 2007 the Bank of England base rate was over 5% but in 2010 the base rate was held at 0.5%.

The economic outlook was given as the main limiting factor for business growth. Price competition and small margins were also among the main reasons given along with limited demand in domestic markets.

An Increase In UK Foreign Currency Reserves

A recent press notice concerning official holdings of international reserves from HM Treasury and the ONS shows that in December 2010 the UK Government's net foreign currency reserves stood at $38,366m, up $976m. Gross reserves were up $2,836m to $78,801m. The Bank of England's net level of reserves were up $18m to $2m and the gross level of holdings was up $2,890m to $27,500m.

There were no intervention operations in December 2010 to support sterling by the Government of by the Bank of England to support their monetary policy objectives.

Stocks Of International Currency Reserves

Movements in UK Government net foreign currency reserves in June meant they increased by $435m to a level of $34.7bn or £23.26m compared with $34.3bn or £23.77bn at the end of May 2010. Gross reserves decreased by $654m to $71.1bn. The Bank of England's net foreign currency and gold holdings decreased by $3.06m to a level of -$3.98m. Gross foreign currency holdings at the Bank of England increased by $876m to reach a level of $24.2bn.

Noah's Ark

The Government is steering the ship. It has instruments of control to direct the economy in a particular direction. The most important instruments include public spending and taxation decisions to alter the course of the economy. Economic indicators tell us how well a policy is working. Budgetary instruments of control are used to vary the amount of public spending to increase or depress economic activity and to target its spending to try to influence groups or areas.

Earlier administrations have denied that government could control the economy in this way. The most they could do, they said, was create the right free market conditions and competition would do the rest. Governments still do try to steer the economy. It tries to control inflation as all post-war governments have done. The recent recession and government financial support for the banks show that free markets are far from perfect and government intervention is occasionally necessary (Jones et al. 1998).

At the centre of the machine are the Treasury and the Bank of England. There is considerable argument about the extent of their power but they have an important ongoing role in daily strategy and tactics in fiscal and monetary policy (Jones et al. 1998). The Chancellor of the Exchequer has initiated several policy actions in recent months to help cope with the credit crisis, stabilize the economy, control inflation and control unemployment. Macroeconomic objectives also include long-term sustainable economic growth. The Governor of the Bank of England has also used its policy tools to carry out its functions and achieve its objectives (Parkin, Powell and Matthews, 1997).

Recessions begin when investment slows down. If investment is maintained at a modest rate, capital stock grows slowly and the law of diminishing returns works in reverse. Real business cycle theory takes changes in investment demand and demand for labour into consideration. People can decide when to work and how much but must use the real interest rate. If the quantity of money changes, aggregate demand changes. The 'dismal science' says that however much investment and technological change occurs real wage rates are always being pushed back down to subsistence levels. It is the theory on which classical population growth economics is based. The classical growth theory is likewise based on the view that population growth is determined by income levels. Modern growth theories turn the classical theory on its head.

According to the modern growth theory founded by Joseph Schumpeter new technologies are the source of economic progress. In capitalist society it creates turmoil, a process of 'creative destruction' creating new businesses and destroying currently profitable businesses. Rising incomes slow population growth because they increase the opportunity cost of having children. Growth occurs because the technological advancement and productivity growth prospects are unlimited.

Miscalculations of inflation may give an inaccurate measurement of real GDP growth. They probably give a fairly accurate estimation of the phase of the business cycle. Other indicators, such as jobs, correlate. Real GDP figures can overstate the situation because in a recession household production and leisure time are countercyclical and tend to increase. They also tend to understate to long-term growth rate. Impulses will come from future expectations of sales and profits on one hand and an increase in money supply on the other. An unanticipated change in aggregate demand due to fiscal or monetary policy may also bring a change in real GDP (Parkin, Powell and Matthews, 1997). The banks must get things moving again. Economic policy is made up in the process of execution and relies on private bodies like banks. The economy cannot work without banks circulating notes and coins, processing cheques and acting as financial intermediaries to businesses (Jones et al, 1998).