In-flation, not de-flation, in the U.K.

In a preview of coming attractions for the U.S. Labor Department, the U.K. government announced that, for the first time in nine months, the annual inflation rate has a "plus" sign in front of it, largely due to comparisons against plunging energy prices a year ago.

This story in the Telegraph provides the details:

UK inflation rises for the first time since February
Inflation rose for the first time in eight months in October in what economists say is the start of a string of increases as fuel costs climb across the economy.

The Consumer Price Index (CPI) - the measure used by the Bank to set interest rates - is now 1.5pc higher than a year ago, thanks in part to the steep fall seen in oil prices a year ago. City experts had forecast that CPI would climb to 1.4pc. October's rise was also spurred by a jump in the price of second-hand cars and the rising cost of air fares.

Economists now expect inflation to rise over the coming months as the sharp decline in energy prices and fuel costs that followed in the months after the collapse of Lehman Brothers are not repeated.

The absolutely insane fixation on "consumer prices" by central banks around the world as the predominant factor in formulating monetary policy (to the near-exclusion of everything else) is going to take on a whole new level of absurdity over the next four or five months.

It's one thing to have zero percent interest rates when annual inflation is also zero, but, if consumer prices are up two, three, or even four percent from a year ago, that means zero percent short-term rates translate to real interest rates of minus two, three, or four percent.

If asset prices are still rising come January, February, and March when the worst of the year-over-year comparisons will be reported, economists are going to have a lot of 'splainin to do, as Ricky often told Lucy.

A three percent reading for inflation appears to be more likely than not, at least in the U.K.

"So it is up, up and away," said Alan Clarke, an economist at BNP Paribas. "I think we'll get to 3pc or above by January. Everyone knows this is coming, the Bank of England included, and last week they said 'don't read to much into it, we can't control near term inflation.'

The broader measure of inflation known as the Retail Price Index (RPI), which includes the cost of housing, is still 0.8pc lower than a year ago.
Experts remain divided on how big a threat inflation will be over the next 12 months given the increase in unemployment, the pressure on people's wages and the 6pc contraction in the economy since the recession began.

The Bank has slashed rates to a record low of 0.5pc and pumped £200bn into the economy in an effort to ward off the threat of deflation - or a sustained fall in prices.

James Knightley of ING Financial Markets said: "given the spare capacity in the economy, there's no real need to tighten monetary policy anytime soon."

Comforting words about "spare capacity" and, in the U.S., an "output gap" that is still quite large are not likely to have the desired effect on those fearful of rip-roaring inflation given all the money printing that's occurred over the last year.

If economists thought the last year was tough, the year ahead might be even more difficult.