Inflation plunged for a second month in a row yesterday as the Governor of the Bank of England, Mervyn King, said that the weakness of the economy and the continuing reluctance of the banks to lend meant that "additional measures will probably be required to underpin lending to households and companies". Ministers are expected to announce further state guarantees for bank lending, perhaps in the next few days or weeks.
The Office for National Statistics reported yesterday that the annual rate of CPI inflation, the measure targeted by the Bank of England, fell from 4.5 per cent in October to 4.1 per cent in November. The older RPI measure, which includes the impact of lower mortgage interest payments and slumping house prices, fell by even more, from 4.2 per cent to 3 per cent – the sharpest slide since 1991.
Almost all of the fall in inflation was due to fuel prices, which fell 8.3 per cent on the month. The price of a litre of petrol stood at 95.2 pence in November, down by 9.3p on last year. Food inflation, though, rose slightly, from 10.2 to 10.6 per cent. Although the drop in inflation was slightly less than analysts predicted, all agreed that by next year prices would actually fall on a consistent basis for the first time since the early 1930s, and that the Bank of England would cut rates from 2 per cent currently to close to zero, unprecedented in its 314 year history.
Such a deflation in the price level and the accompanying boost in purchasing power should prove a boon to workers who will be hard pushed to see large pay rises next year, and may help keep unemployment lower than it otherwise would be.
In his explanatory letter to the Chancellor, required because inflation is still so far off its 2 per cent target, Mr King indicated that the Bank expected inflation to drop dramatically.
"Given the short-term outlook, it is quite possible that I will next write to you to explain why inflation has deviated by more than one percentage point below the target during 2009," the Governor said.
Such a fall will be accelerated by the cut in VAT (effective on 1 December and therefore not reflected in yesterday's statistics). Many economists see the prices themselves – not the rate of price inflation – falling by 3 or 4 per cent a year by next summer.
Despite the generally good news on prices, one group of City analysts is now predicting the deepest recession since the Second World War.
Daiwa Securities say that 2009 will be truly grim: "Recent activity measures, including October's industrial production numbers and the results of purchasing manager surveys, have pointed towards a significantly deeper fall in output in the fourth quarter, most likely in excess of 1 per cent. We have revised down our forecasts for GDP growth and now see activity contracting by 2.8 per cent in 2009."
Such an outcome would beat the previous post-Second World War records of minus 2.2 per cent (1980) and minus 1.7 per cent (1974).
Opec meeting: Output set to be cut
With demand for oil falling for the first time in 25 years, the cartel of oil producing countries is expected to cut production by as much as two million barrels per day (bpd) at its meeting in Algeria today.
There is little doubt that the meeting of the 13-member Organisation of Petroleum Exporting Countries (Opec) will agree to reduce output in an attempt to shore up the oil price. Opec's own data, published yesterday, predicts demand will fall by 1.4 million barrels per day (bpd) across 2009 as a whole, with even sharper declines in the first six months.
To put the new forecast in perspective, Opec was predicting growth in demand of 1.3 million bpd in June, and last month estimated a 490,000 bpd rise. Demand is falling so fast that there are already stock backlogs – some 45 million barrels of crude are in floating storage around the world – and the problem could yet worsen.
"The growing imbalance in the oil market over the coming quarters will lead to a much higher overhang in inventories, if the global recession deepens," Opec's report says. "This presents a real challenge for all market participants and will be the main focus of discussion." Even yesterday's gloomy predictions for 2009 may prove optimistic. "The worsening world economy is expected to have a strong impact on oil demand next year especially in [developed] countries," Opec says.
The cartel has already cut output twice this Autumn, taking two million bpd out of supply. But the measures have had little impact – oil prices have dropped by more than two-thirds since the unprecedented $147 per barrel high in July. Opec's average monthly "basket price" shows an inexorable decline: $96.85 in September, $69.16 in October, $49.76 in November, $39.90 so far this month.
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