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Posts Tagged ‘Inflation’

The briefest of respites from a continuous barrage of negative financial news was the announcement made early Tuesday that inflation figures in December fell sharply to an annual 3.1%, a sharp drop from the November rate of 4.1%. From Consumer price inflation fell sharply in December to an annual rate of 3.1% from November’s figure of 4.1%. 

Financial experts suggested that the major factor behind the reduction was the 2.5% cut in VAT announced late November 2008

Factors taken into account when calculating the UK inflation rate include mortgage rate, the retail price index which fell by almost two thirds from 3% in November to less than 1% in December, the largest fall and the lowest rate in one month since 1981

Undoubtedly the major cause of the fall in the retail price index was the welcome and seemingly continuous drop in petrol prices at the pump, which unfortunately was not felt in transport costs, with air fares and public travel on the rise. Retail prices also took a major tumble in December, the first time that the annual Christmas rush witnessed such a phenomena.  Clothing and footwear prices were down an average of more than 105 from the corresponding prices of 2007.

Those economists who do not like to give out too much good news are happy to report that if inflation continues to drop, it won’t be too long before deflation begins to raise its ugly head.  Forecasts are that deflation may be with us by the middle of 2009, largely brought on by a lack of consumer confidence. Understandable as it may seem, it could mean that consumers will continue to delay major purchases on the premise that next month the goods they want or need will be even less expensive 

Any attempts by the Government to counter the downturn in sales may have a limited impact. Consumer credit remaining is very hard to find and the interest rates very high for those that do.  All in all, the current atmosphere in the UK is not conducive to consumer spending.  

When speaking of atmospheres, the atmosphere in banking circles is decidedly bleak. One can imagine a scenario where Gordon Brown phones Alistair Darling just before they turn in for the night to comfort each other by saying “At least tomorrow it can’t get any worse” Only to wake up in the morning to discover that it has.

Yesterday’s bombshell, and probably the largest to date, was that the  announcement  late on Monday that  the Royal Bank of Scotland had succeeded in making the largest trading loss in UK corporate history yesterday. Initial reaction in British financial circles was that Brown and Darling would have no option but to nationalize the bank, setting of considerable panic among the RBOS’s few remaining private sector shareholders.

The 28 billion pounds loss was made up from eight billion pounds of toxic assets and the further 20 billion pounds of losses made through acquisitions which proved to be unwise in the extreme, with the 2007 takeover of Dutch bank ABN Amro in 2007 being the jewel in the crown.

On the back of this disastrous news RBOS shares fell by two-thirds in value, closing at 11.6p. Per share  

In relation, the rest of the UK banks fared slightly better, and the general uplift in confidence and optimism expected after the announcement of a second buyout soon fizzled out.  

This article was written by eCommerce Associates for Bank — Accounts and our Finance Blog