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Now market fears deflation
Paul Waugh, Deputy Political Editor20 Jan 2009
The spectre of deflation - falling prices and a stagnant economy - loomed large today when official figures revealed the dramatic scale of price-cutting over Christmas.
The official measure of inflation had its steepest one-month fall since March 1992 and one of the biggest on record.
The sudden slow-down in the cost of living was partly caused by the Government's cut in VAT from 17.5 per cent to 15 per cent, designed to boost spending in the run-up to Christmas.
But the unprecedented high-street discounting through December also contributed to the collapse in the inflation rate.
The headline rate of inflation - the Consumer Prices Index - is expected to carry on falling through 2009 and could go negative by the end of the year. Economists fear that prolonged deflation could make the recession worse because consumers hoard their cash in the hope that prices will fall further.
The Bank of England has already cut its official interest rate to an all-time low of 1.5 per cent to encourage businesses to borrow and consumers to spend.
Today bank shares rallied slightly in the City after yesterday's catastrophic falls that saw two thirds wiped from the value of Royal Bank of Scotland.
RBS shares were up 1.5p at 13.1p, Barclays rose 1.9p to 89.9p, Lloyds were up 0.9p at 65.9p and HSBC were 9p higher at 510p.
However, despite the rally, wholesale nationalisation of RBS was mooted today as senior members of the Government pushed for 100 per cent ownership rather than the 70 per cent the taxpayer currently owns.
Labour former Treasury chief secretary Lord Barnett told peers: "We are in danger of forgetting that this stems from the incompetence, if not much worse, of the very people - the bankers - whom, to some extent, the Government are depending on to run the banks."
Labour former minister Michael Meacher said the first bail-out had not "wholly succeeded" and there could be no guarantee the latest scheme would succeed either.
However, Chancellor Alistair Darling, who admitted that the Government has a regulatory duty, said: "I don't think in the long term [Government] ought to be running banks."
Reader views (5)
Surely the first place to look for government cutbacks is MP's expenses which were supposed to be made public? However, whilst Obama's inauguration and the Gaza crisis have been stealing the headlines someone slipped in a vote on Thursday to overturn the high court ruling to make MPs' expenses concealed again. Write to your MP to get them to vote against this (although they probably won't, snouts in troughs).
- Bob, Cheam, 21/01/2009 07:43
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"Falling prices and a stagnant economy" - I can't see any evidence of the former, other than for things I don't want or can't afford (cars, houses, foreign holidays), but the latter is all too pervasive.
- Nobby Clark, Perth, Scotland, 20/01/2009 15:27
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Well said, Mike. Blair certainly did leave just as the leaves were starting to turn.
- Isabel, Woking, 20/01/2009 14:14
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Brown got the timing wrong. He thought Blair would go much earlier and give him a good spell in power before the bubble burst. Blair clung on until big trouble was imminent.
- Mike Newland, London, 20/01/2009 12:40
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Dont forget that the Government mandated the Bank of England to manage "inflation", it was not asked to manage asset inflation. An economy awash with cheap cash pushed all asset prices up, and that bubble is now unwinding fast. This was a glaring policy mistake that Eddie George alluded to in 2004. Now we all pay, and pay, and pay.
- Dave Davies, Basingstoke, 20/01/2009 11:16
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