Inflation Breaks Out in the UK

So, a recession can be married with a rapid rise in inflation after all. The UK economy, crippled by the effects of austerity and a global economic slowdown, had an annual inflation rate of 5.2% in September. The Office of National Statistics wrote, “CPI annual inflation has never been higher but was also 5.2 per cent in September 2008.”

Details from the report show that energy costs rocketed higher, as did the cost of nondurable household goods and transportation.

UK policy markets are threatened with one of the most vexing economic situations of all. Slow real-wage increases and unemployment have undermined consumer purchasing power. The government’s austerity program plans to put tens, if not hundreds, of thousands of people out of work. Both the employed and unemployed are now under pressure from an increase in their costs of living.

The news shows how powerless central banks are to bring change to the economies of their countries. The Bank of England has kept interest rates low, as has the Federal Reserve. While those rates remain low, they have not altered a run up in the costs of essentials like energy, which are driven as much by global supply and demand as by rates charged by banks.  The U.S. inflation rate has stayed modest, but when energy is factored in, the figure is above 3%.

The UK does not have any way to solve its inflation trouble coupled with flat to falling GDP growth. No ready policy solution means no solution at all for now. Many experts believe that economies heal themselves over time as pessimism among consumers and businesses turns to guarded optimism. The reasons given for this transformation are vague. It is hard to see how that transformation will happen in the UK. And, it may be a canary in the coal mine for the U.S.

Douglas A. McIntyre