What IS happening to prices?

During the Great Depression prices in the US fell by 10% a year from 1930 - 33. Fears of deflation are obviously weighing heavily in the minds of the Bank of England's MPC (see 'Turn on the printing press' below) But what exactly IS happening to prices in the UK.

On the government's preferred measure of prices (the Consumer Price Index - CPI), prices were UP 3.0% last month compared to January 2007. So what is all the fuss about deflation? Part of the problem is that whilst the CPI shows prices rising the comparisonn is with the same period last year. So prices may be falling but they may still be higher than last January. The expectation is that by the middle of the year CPI will be showing more of the trend that worries the Bank of England.

An alternative measure of prices, the RPI (Retail Price Index), shows prices last month only 0.1% higher than last January. But the RPI includes a measure of mortage interest payments which are falling due to lower interest rates and falling house prices. The correction in house prices is probably in itself desirable. Asset price bubbles as they are known (over-inflated house prices for eaxmple) tend to devote scarce resources away from their most productive uses - a little less obsession with property prices would not be a bad thing. The house price bubble of the last decade is, after all, why we are where we are today and what led to 'creative' banking practices at the root of the credit crunch.

Prices, then, may not be falling and inflation may still be above the Bank of England's target rate of 2%. But, as we have seen, economic indicators can turn on the head of a pin.

Watch this space ...

Useful weblinks

Spectre of deflation haunts Britain (Independent)

Protests over mining

This story is perfectly timed for my Year 13 students as they start their final A2 module. I doubt that many of them spotted this on Tuesday night - they may have been doing some revision for their synoptic module (or I hope they were!).

According to this BBC report, 10,000 people encircled the Niyamgiri hills in Orissa to protest at the ruling of India's Supreme court to allow a UK based firm to begin mining bauxite in the hills. Local tribes view the hills as sacred and mining activities clearly threaten their culture and way of life. Vedanta argues the extraction of bauxite will earn valuable export revenue, generate jobs and increase the standard of living for local people and that such natural resource endowments provide the key to economic development in the area.

Campaigners on the other hand argue that "India's rush to development should not come at the expense of traditional and sustainable ways of life of tribal and marginalised people".

There are lots of issues in this story which we will explore over the coming months including:

• the meaning of development;
• the charactreristics of developing countries;
• the role of multinationals;
• sustainable development.

My challenge to Year 13 students
Best response to the two questions below by the end of this week
1. What is the difference between economic growth and development?
2. To what extent are global patterns of trade determined by countries' resource endowments?