King confirms green shoots

CPI inflation has fallen to 1.6%, and RPI inflation started to recover to -1.3%, in the measure of the annual rate to August. Is this good news?

For CPI, it means that the rate is moving further away from the target of 2%, which would be a concern if it was to continue on that trend, but the RPI measure indicates a slightly lower level of deflation, which should be a welcome sign. However, in both cases, it depends upon the reason as well as the expectation of what happens next. In a speech to the Treasury Select Committee, Mervyn King suggested that inflation is likely to be volatile over the next year, and focusing on GDP, he said that there were signs of a recovery to positive growth in the third quarter of the year.

But he remains very cautious; although the European Commission forecast the UK to grow 0.2% between July and September, this is less than in France or Germany, and Mervyn King suggested three factors, or headwinds, against which UK growth would have to struggle in order to become positive.

- The first is the continuing reluctance of banks to lend to business, particularly small and medium sized businesses

- The second is that individuals as well as businesses are currently focussing on repaying debt rather than spending to create demand

- The third is the inter-reliance that the UK economy has on the economic condition of the rest of the world – although he did identify some encouraging signs of recovery in Asian economies.

Is it an irony that, two years ago, the first two of these might have been welcomed as indication that banks were taking a more cautious approach to risk, and that individuals were reducing their marginal propensity to consume to sustainable levels with a greater propensity to save some resources for the future? Now, both of these are becoming problems which are hindering the recovery from the recession that they helped to create. This must go to show that, when considering whether behaviour of economic actors is good or bad, the answer must be that it depends on the economic conditions prevailing at the time.