Inflation capitulation

Having said we were reducing our reports to every other day, there will be occasions when we will feel it’s worth highlighting notable events at the time. On Wednesday the minutes from the last MPC meeting were released, and much to our, and probably others surprise the vote went from 7-2 to 9-0 for a change in interest rates. One sentence from the minutes encapsulates the current thinking of central bankers across the globe. The sentence in question  "the fall in the oil price has raised economic growth expectations and lowered inflation expectations". This feels an anomaly, when in history has an improved outlook for growth not led to an increase in inflation expectations, outside of current times, our bet would be never. Even Mr MaCafferty appears now relaxed about the outlook for UK inflation, he was the last man standing. We have argued often in this blog that interest rates will not rise in the short term, and it appears this view is becoming more consensual. Mr Mcafferty argued previously for a pre-emptive rise to prevent too rapid a rise at some date in the future, Mr MaCafferty's change of heart signals that even the most hawkish central bankers are becoming dovish. It does really feel like the world’s central bankers have capitulated on inflation.

We thought it was worthwhile doing a back of the envelope calculation on what  the impact could be of falling oil prices on consumer spend. If we assume the average spend on fuel was thought to be around £1300, and there are 31m cars on the road, that would mean something like £40 billion is spent on petrol as a nation in a year. If the price of petrol falls by 25%, that could mean an extra £10bn goes can go back into the economy from the consumer alone. Consumer spending  (according to trading economics) is 277bn pounds a year, a 25pct fall in pump prices in theory could add 4% to consumer spend.  

Later today we get the decision from the ECB, with few exceptions the investment banks are predicting at least 500 million euro's of commitment. The devil may well be in the detail, like when they will start these purchases? Will they include non-investment grade i.e. Greek debt? Will the responsibility be shared? Will they include corporate debt? We will know at 130. 

Posted on January 21, 2015 .