Wednesday, March 25, 2009

Relative European Inflation Rates+ BoE Might Limit Further Inflating

For February (Source for U.K. number here). These numbers correlate quite nicely with exchange rate movements for countries with floating exchange rates, and with relative economic strength for countries with fixed exchange rates or members of the European Monetary Union, in accordance with the theoretical principles I described here.

Iceland 21.6%
Latvia 9.4%
Lithuania 8.5%
Estonia 3.9%
Poland 3.6%
UK 3.2%
Slovakia 2.4%
Sweden 2.2%
Holland 1.9%
Greece 1.8%
Denmark 1.7%
EU 1.7%
Italy 1.5%
EMU 1.2%
Germany 1.0%
France 1.0%
Spain 0.7%
Portugal 0.1%
Ireland 0.1%
Switzerland -0.1%

The notable exceptions being Latvia and Lithuania, and to a lesser extent also Estonia, who has much higher inflation than you would expect given their economic growth and given the fixed exchange rate they have to the euro. This is in part a result in the two former cases of an increase in the Value Added Tax (VAT) and in part the lagged effect of the previously very high money supply growth rates.

The U.K. number BTW apparently surprised many analysts significantly on the upside, as they didn't think that the extreme weakness of the pound would somehow cause import prices to go up and that this wouldn't also make domestic manufacturers more willing to raise prices (or abstain from cutting them. But no need to worry for British readers as the Keynesians at Telegraph assures you that a lower purchasing power of your earnings is good for you.

However, as a result of the higher inflation rate, Bank of England Governor Mervyn King seems to be getting second thoughts about his plans to inflate even more (at least about implementing it fully), something which caused the pound to rally yesterday.


Blogger russin said...

Singapore finance minister annouce that they will be out of the recession in 6 months time. What do u think? Is that possible? Dow jones needs to go higher than 8500 to convince me that recession is soon over.

10:53 AM  
Blogger stefankarlsson said...

I haven't analyzed Singapore specifically very much, but for them it is more important if China and the rest of Asia stabilizes, than if the Dow does.

11:42 AM  
Blogger Henry said...

Only the experts in the UK were surprised about the inflation rate. Obviously they must get someone else to do their shopping for them.

But as for purchasing power parity, I have found a strange thing - that in general 10 SEK will buy about 1 UKP worth of goods, especially food that isn't junk food. Also clothes and travel seem cheaper which accounts for the major part of my own spending (though it probably isn't typical and it may be just an impression I have got), so the longer I stay the more I save!

The UK may have come to the end of its inflationary binge. Apparently HM has called in some key politicians.

11:28 PM  

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