Is this the end of high inflation?

Factory gate prices have fallen, driven by drops in the price of petrol. And things aren't looking too shabby in the eurozone, either.

by Emma Haslett
Last Updated: 06 Nov 2012
Is this the beginning of the end for high inflation in the UK? New figures from the Office for National Statistics have shown that the price of manufactured goods dropped unexpectedly last month – their first decline in 18 months. While factory gate prices (which measure the price of goods sans VAT, the margins added by retailers, etc) dropped by 0.2% in December, producer prices rose by 4.8% from the year before – their lowest rise in a year. And it looks as thought things in the eurozone are looking more encouraging as well…

The ONS said the drop was caused by the falling price of petroleum products, which plummeted by 0.9% during December, pushing down the amount it costs to manufacture goods. So perhaps the Bank of England’s prediction that inflation will start to fall during 2012 will start to come true. Particularly given that this is the month year-on-year inflation figures will stop showing the effect of last January’s rise in VAT. At this rate, we might have to start worrying about deflation instead…

No such woes in Italy, where the cost of borrowing has fallen after its government auctioned off €4.75bn of bonds this morning. Although some analysts have said that, with bidders offering 1.22 subscription, buyers weren’t quite as enthusiastic as they would have liked, it was enough to push yields on three-year debt down to 4.83%, from 5.62% during the last auction Italy held at the end of December.

It’s a similar story in Spain, which raised a cool €10bn – twice as much as it had originally planned – on bonds it issued yesterday, with investors bidding almost four times the amount that had originally been offered. Although analysts pointed out that it’s probably to do with a boost in confidence created the ECB’s issue of cheap loans back in December, it’s still good news for a country whose bond yield has recently hovered perilously close to the 7% mark (at which investors deem a bailout is necessary). Is this a temporary lull, or a permanent shift? Only time will tell.

Of course, that’s peanuts, compared with the $1.2tn (£782bn) President Obama has just told Congress he wants to borrow. Apparently, the US needs the extra cash to ‘meet existing commitments’. If the extra borrowing is approved, it’ll raise the US’ debt ceiling to $16.4tn – which will go down like a lead balloon with Republicans. Remember the furore over US debt in August, which culminated in ratings agency Standard & Poor’s downgrading Uncle Sam’s credit from AAA to AA+? Congress now has 15 days to vote on Obama’s plans – but with an election just around the corner, we have little doubt that Republicans will try to draw as much ammunition as possible from them before anything is approved. So expect inflated rhetoric, if nothing else.

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