Prices rise but outlook remains grim
Figures out today showed a surprise rise in inflation, but prospects for the economy still look poor.
UK prices have risen 3.2% over the last year according to today's CPI numbers (consumer price index.) That's a surprisingly large increase - pundits had expected the rise to be around 2.6%. Prices have been pushed up by rising food prices and the falling value of the pound. When the pound falls compared to other currencies, the price of imported goods in our shops rises. So does that mean all the recent fears of deflation are stuff and nonsense? Well, I still expect prices to start falling later this year. Indeed, we learned today that a different measure of inflation - the Retail Price Index (RPI) - shows a 0% change over the last year. (The RPI is lower because it includes housing costs - unlike the CPI.) But thanks to all the recent bail-outs and pump priming, a period of prolonged period of deflation may no longer happen. Maybe. That doesn't mean that the economy is about to recover though. For starters, higher prices in the shops won't encourage consumers to splash out. And if consumers don't spend, businesses can't grow. What's more, Bank of England boss Mervyn King has cautioned the government not to introduce more fiscal stimulus measures. King told MPs today: 'We are going to have to accept for the next two or three years very large fiscal deficits. Given how big those deficits are, I think it is sensible to be cautious about going further in using discretionary measures to expand these deficits.' When an economy is in recession, the government receives less tax revenue and has to spend more on social security benefits. King is arguing the government shouldn't make the deficit even larger by cutting taxes or building more roads. That's an understandable viewpoint. If the national debt grows too large, the government may struggle to finance the debt. Then we could be back to a 70s-style situation where we beg for cash from the IMF. On the other hand, if the government follows King's advice, the economy may take longer to recover as it won't be boosted by extra government spending. So whatever the government does, things look gloomy. All most of us can do is try and be as careful as possible with our money and batten down the hatches till the good times return.Deflation scare
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