UK Stagflation Worsens Materially As Inflation Jumps To Highest Since 2008, Deficit Surges

Tyler Durden's picture

More bad news out of the UK, where CPI inflation surged from an already nosebleed inducing 4% to 4.4% in February coupled with deteriorating budget shortfalls as public borrowing was nearly double the consensus. The inflation number is particularly worrisome as it was the highest since 2008, driven by a surge in clothing price inflation. It seems at least UK retailers have reached their margin breaking point and have no choice but to hike end prices at this point. From Goldman: "CPI inflation rose from 4.0%yoy to 4.4%yoy in February (vs. Cons. and GS: 4.2%). This is the highest rate of inflation since 2008 and was driven by a sharp increase in clothing price inflation (from 1.3%yoy to 2.8%yoy). The public-sector borrowing data were disappointing on the month (£10.3bn vs. Cons: £8.0bn, GS: £4.3bn) but that overshoot relative to consensus expectations was almost entirely offset by (net) downward revisions to previous months' data."

More from Goldman Sachs:

1. The transport component of the CPI was the largest contributor to the rate of year-on-year inflation in February, adding 1.3%pts to headline inflation. Within this, the significant drivers were fuels and lubricants, the prices of which rose by around 16%yoy. The increase in the year-on-year rate of inflation in February, from 4.0% to 4.4%, was driven both by the 'clothing and footwear' and 'housing and household services' components (with gas bills making the largest upward contribution in the latter). Together, these two categories contributed more than half of the 0.4%pt increase in inflation between January and February.

2. The increase in VAT at the start of this year will continue to have a base effect on inflation through the duration of 2011. Combined with a rising contribution from commodity and food prices, we expect CPI inflation to peak in the coming months but to remain close to 4% throughout 2011. Over the medium-term, downward base effects from recent energy price increases kick in only at the tail-end of this year, allowing a decline in headline inflation to around 3% by December. These downward forces are then likely to be amplified by base effects in early 2012 (from the January VAT increase) and extended through the first half of next year. We will send out an updated inflation path later today.

3. There is a high level of disagreement within the MPC as to how much of a danger recent inflation readings pose. While the median voter on the committee remains wary of attaching too much weight to spot inflation, we learned from the February minutes that "of those members not favouring a rise, some thought the case for an increase had grown". This morning's CPI print, and its implication for near-term inflation dynamics, is likely only to add fuel to the fire of this debate.

4. Also released this morning, headline public-sector borrowing (i.e., including financial interventions) overshot consensus expectations by around £2½bn in February. This was almost entirely offset, however, by cumulative revisions to the PSNB over the ten months of this financial year. On the PSNB measure excluding financial interventions, borrowing came in £4½bn higher than expected on the month; the effect of revisions to prior months lowered the cumulative 'PSNB ex.' by £1.3bn. The growth of tax receipts edged lower in February but remains consistent with nominal GDP growth of around 4%yoy (Chart 1).

5. Tomorrow's Budget is unlikely to provide any major surprises, principally because the government has already set out its fiscal plans for the duration of parliament in some detail. Two key things to watch will be the downward revision to the OBR's 2011 growth forecast (previously 2.1%) - a mechanical consequence of the weak Q4 GDP data - and the new deficit forecasts (likely to be revised down for 2010/11 but revised higher for future years, partly as a result of weaker GDP growth in 2011).

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Harlequin001's picture

a few government cut backs should soon sort that out...

Dan The Man's picture

Yah, I thought inflation was the point. They want asset values up. They don't much care about the collateral "stag" damage. that's just the part that us little people have to deal with.

A Man without Qualities's picture

The inflation they want is the velocity of money type and they hope this feeds through to house prices.  The reality is, all they are getting is rising living costs (courtesy of the Fed and the PBoC and now the BoJ), while house prices are some 20% off the peak.  Raising interest rates is what they are supposed to do, according to the rule book, but given the fact some 80% of mortgages are now variable rate, it will create a further dip in housing and probably won't do much about the price of basics like food and energy, so it's just one more country where those that were conservative but sensible in their domestic finances  are being impoverished to support the reckless.  However, stagflation will ruin them all.

EscapeKey's picture

I agree with your initial analysis, however, once ARM mortgages start defaulting in mass, the housing market will hit bottom, and from there start its upwards movement in tandem with other asset classes will slowly start.

When exactly this bottom will be reached is hard to say, but there will be good deals to be had.

morph's picture

The sad thing is house price rises protect the wealthy. When house prices crash, its the million pound home owners who are hit hard nominally. These people include MP's. People with money and assets always have a bigger say in the way things are run. And of course, the people who own the most assets are the banks! They want to collect interest, issue more loans to you, and still have a nice valuable house to reposess when you default. Welcome to riskless lending, until it all goes wrong of course like 2008.

The UK's big problem is that even the minimum average house price index shows that a house around 6x higher than the average salary. I want to buy a house, but no way am I paying the prices people are asking. The prices are simply delusional. The rent I pay on my current house in a year works out at about 4.5% of its value. Barely enough to cover interest payments (read line bankers pockets as they borrow at 0.5 to lend at 4.5). Rent includes all maintenence fees, ground fees and if anything breaks, I don't have to pay for it.

Unfortunately no one will ever learn that you can't build a sustainable economy on house price boom and borrowed money. At the end of the day, someone has to pay. Currently that is me paying for my parents and grandparents lifestyle.

The most ironic part of UK inflation is that during the past 15 years when inflation was apparently low, house prices have trebled.

DosZap's picture

Sorry mate, I would stay right where you are.

Anyone buying a house now is nutso.

Plus, you are not paying for your parents lifestyle, if they worked, and paid benefits their entire life, I highly doubt you paid their keep growing up, nor brought their flat, nor maybe a car, and furnishings.

Those came from their checks.

Just like here, we are forced to pay SS/FICA, etc, and have no say.

To support others who did it before us.

It's not the parents or kids, its frigging government, I have yet to meet ONE that spends within their means,with OUR money.

It's just like when someone gifts something to you and your immature, you could give a rats ass about how it's taken care of.

 YOU pay for and it's a whole nuther ball game.

westboundnup's picture

Enjoy the Royal Wedding in April.  It may be one of the last happy moments in quite a while.  

Twindrives's picture

The peasants don't give a damn about the 'Royals'.   They can burn in hell with rest of Obama's elitist supporters.

DosZap's picture

Obaba was not invited, I know it simply crushed his Ego.

HelluvaEngineer's picture

Yup.  Gonna be raisin' rates.  Any day now.  Wait for it.

X. Kurt OSis's picture

Those wankers will never raise rates in earnest before we do.

They're just the first lemmings to go over the side of the cliff. I can't wait for ECB/BOJ to go down... Then we'll see just how decoupled emerging markets are from developed.

Harlequin001's picture

and you'll never raise rates until it's done for/to you.

same boats, same waterfall, you're just a little further behind.

and by that I mean not very far at all...

Staggers me that anyone can claim that an emerging market that builds it jobs and manufacturing on exports to an economy that just went bang can be in anyway described as 'decoupled'.

X. Kurt OSis's picture

Oh what a glorious day that will be!!

The view on how emerging economies can be decoupled doesn't surprise me at all. We've had decades of financial insanity where people are encouraged to go on Bloomberg/CNBC and spew their schizophrenic delusional ramblings to all the sheep baa'ing mindlessly at their desks.

See my post below. According to Bloomberg, black swans are a bullish indicator!! How that's not criminal is the only thing surprising.

The idiots at the switch have killed us all.

Enjoy those bread lines, wankahs!!!

Seasmoke's picture

the can is sure getting bigger and is going to break someones foot , if they keep kicking it

X. Kurt OSis's picture

At least they use lubricants when they hike train fares in the UK... Clearly our much more civilized cousins.

Chumly's picture

Fugly Stagflation with a little depressionary flair added for zest.


Careless Whisper's picture

From Goldman:

that discredits the entire article.

Harlequin001's picture

How can GS be so wrong yet again yet have zero trading loss days in a quarter?

DosZap's picture

If Congress wasn't full of pedophiles, and transgendered members, eunuchs, we might could find ONE set of testes there, that would bring GS/JPM in for a sit down and put a boot on their throats and provide their way of doing what is superhuman, and no one else can ever do.

It's simple,you win every game, when you make the rules.

X. Kurt OSis's picture

Did anyone happen to see the BTFD cheerleader article on Bloomberg this AM? No need for a link. To summarize, global economic growth can't be stalled no matter how many black swans swoop in. Astroids be damned. As per Bloomberg, stocks will never go down again... Which is obviously great news! Cover those shorts, bitchez!!!

A Man without Qualities's picture

Yes, "All clear sounded.."  We live in absurd times.

Horatio Beanblower's picture

"Before the fiddlers have fled,

Before they ask us to pay the bill,

And while we still have that chance,

Let's face the music and dance..."


- Irving Berlin


There may be trouble ahead (Child 'terrorists' photo row) -


For anyone wishing to work in the UK, more information is available here -


For anyone wishing to work in the UK, psychiatric help is available here -


For anyone wishing to work in the UK as a psychiatrist, more information is available here -


The UK is up shit creek without a paddle.  Jim Lahey has it covered -

sudzee's picture

Hyperinflation already exists in digital fiat worldwide. Add up all the debt created worldwide each day for 6 months and you probably have twice world GDP in the last year. Problem is that the masses have no way to access that fiat. Digital fiat/physical fiat is probaly in the neighborhood of 1000:1. Quadrillions of fiat, based on the hard work and savings of the masses, sloshing all around the world in connected hands.

If one takes an example of a small company that has 10 employees who produce $15,000 a week in product for export. The employees and management are creating wealth. If at the same time you have some jerkoff ( CB's )madly typing digits into a computer, what is he producing that adds wealth to a nation. Nothing except enslavement of the poor bastards who are really doing something to better themselves.

Fuck fiat, fuck wallstreet slimebags and fuck jerkoff CB's.

jmcadg's picture

Merv doesn't want to increase rates because he knows it will kill house prices. As those coming off low rates will struggle to pay for their new mortgage. That's if they can get a new mortgage. The banksters are really helping by making it impossible to get a decent rate unless you have significantly more equity. Houses are still way overpriced here. Get ready for a US style collapse. That is Merv's biggest fear. The economy here is so dependent on high house prices.

TruthInSunshine's picture

Merv said he was specifically told by The Bernank that all but London's financial community could eat radioactive cake.

Lord Peter Pipsqueak's picture

And still the BofE refuses to raise rates,King saying that this inflation is caused by external factors that would not be influenced by a rate hike.Total bullshit and lies of course,since most of the inflation has been caused by the 30% devaluation engineered by the Bank in the first place.Any increase in rates would cause sterling to soar thus reducing inflation at a stroke.King and Osbourne's Faustian pact to inflate away government debt and at the same time prevent the housing market from correcting is the equivalent of walking a tightrope across the Niagara falls in a strong wind.

Even if they make it,it will be disastrous for the Uk economy,a generations life savings and pensions will have been rendered worthless by relentless inflation, house prices will still be unaffordable for the majority of first time buyers,and the generations of cretins brainwashed into thinking that rising house prices are a good thing will have learnt nothing and will still be pandered to by the political parties eager to buy their votes with more inflation.

Al89's picture

The United Kingdom never went through real pain during the recession. My neighbours certainly don't earn enough to be living in the houses they are living in, not all of them anyway. Most of them are back to splashing out on home improvement again. In other areas comprised of box houses I see builders everywhere, and gleamings mercs and luxury cars with new plates parked outside.

Central London restaurants all packed every night. These places will be empty and a lot of people in my neck of the woods will be screwed. And they are some of the most overpriced places I know (coupled with mediocre quality).

The city in general is way overvalued, real estate in Central London never took a hit, or much of a hit. One of the most comically overpriced cities in the World right now, if there was a general London ETF I would be short it big time.


Josephine29's picture

As ever Goldman Sachs only look at the most convenient part of the picture.Whilst many like them will not look beyond the headline CPI figure of 4.4% I notice that Notayesmanseconomics has and points this out.

If we for a moment look at our old inflation target of RPI-X we can see that it is indicating an even larger problem than that shown by the current measure. It was targetted to be 2.5% and today it is at 5.5% which is 3% over what was its target. I have long argued that it is a superior measure to Consumer Price Inflation and therefore it means that our inflation problem is worse than the already poor headline figure.


 His policy prescription could be applied to the US as well....

smithcreek's picture

...driven by a surge in clothing price inflation.

Idiots in the UK should take lessons from our government.  A little hedonic adjustment could have made that disappear.  Can't afford jeans from the Gap?  A potato sack is an excellent and much cheaper alternative.  Voila!  No inflation.

Caviar Emptor's picture

Keep in mind Caviar Emptor's Biflation theory, expounded since last year. 

It's the reason you hear non-consensus and confusion from the "experts" ("It's inflation! It's deflation! It's Goldilocks!)

They haven't grasped yet that it's a new animal they haven't encountered before, born of a situation that hasn't happened before: globally coordinated exponential monetary expansion with minimal real economic growth. 

Rodent Freikorps's picture

The key word there is "coordinated."

jmcadg's picture


+1 my friend. UK house prices over 7 times earnings, world average 4 times (at best)! 50% depreciation due.

We have not felt a proper hit yet as house prices went back up in 2009/2010! For no reason. Noticed a headline on one of our crappy papers about how the writer couldn't do without her lattes. Sheeple ready for the slaughter. UK people are mostly TOTALLY oblivious to the oncoming collapse. They wouldn't know a black swan if it bit them on the arse.

themosmitsos's picture

First in the UK, then it goes to the US

DosZap's picture

We should wish our Inflation rate was as low as the U.K's.

REAL #'s for us is in the 10% range.( add the increase of food,fuel) to our fabricated CPI lying their ass off index, and we win over U.K. by far.

Guy shot up a Taco place yesterday, after he had to pay 33.3333% more for six tacos over a price change.

A pint of Blueberries locally went to $6.00 from $3.99 in one week, chicken is $1.00#, WHOLE.

Better pack your houses w/ any edibles that will last, and fill a freezer.

I stopped buying seafood, beef of any kind, and pork.

I can afford to eat what I want, I just refuse to pay 30% higher prices than 6 mos ago.

Jerry Maguire's picture

Operation Empire State Rebellion:  March 28th, 2011.  6 AM to 9 PM.  Wall Street.  Be there or be square.

Let's bring Tunisian and Egyptian style populism to the banksters.