20 January 2010

Economics or B*ll*cks?

The pound has risen to a four-month high against the euro, after higher than expected UK inflation raised the prospect of interest rate rises, says the BBC.

Is that economics or is it bollocks?

Yes you are right. In economics higher inflation pushes a currency down not up. I previously told a little story to explain why that is. So why is the BBC talking bollocks?

Well inflation figures were higher yesterday and the pound did rise against the euro so perhaps lazy journalism put the two together. Coincidence doesn't mean one thing caused the other. In fact the euro fell against the dollar as well, so maybe the pound's rise has more to do with the economic news from euroland where Greece seems to be struggling at present.

Perhaps currency traders do care more about interest rates than economic fundamentals and so they did push up the pound as the story says. It is possible; day-to-day market movements are not explicable by economists. On the other hand, the rise in inflation is a blip caused by unusually low prices a year ago. The bank is not about to raise interest rates. Surely, even currency traders can work that out.

Update 20h00

Now the BBC says:
Euro falls against dollar and pound
The euro has hit a five-month low against the dollar as continuing concerns about the Greek economy weigh heavily on the currency.

That is a little more plausible. Incidentaly the latest inflation figures for euroland are up....

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