Still, it is worth mentioning that recent quarters’ indicators show a slight decline in the percentage of loans that cover a high portion of the property’s value, the Bank Lending Survey reports somewhat tightened credit standards and the business cycle has resulted in a slower pace of total lending growth, although mortgage credit shows a smoother trend. I cannot stress too much how important it is for the agents involved to consider when making their investment and financing decisions that the future behavior of prices might take a detour away from recent trends. Household borrowing risks remain stable. Total household debt rose a little in the last quarter of 2013. In banking debt, there continues to be a shift in composition towards middle to upper income, with faster growth in borrowed amounts than in the number of debtors. Repayment indicators for both bank and non-bank providers show no major change, probably because of a change in composition of the consumer portfolio or because a milder impact of the business cycle on the labor market. Banks have been gradually reducing growth in commercial credit and, while less, also consumer credit, reacting to the economic slowdown. Indicators also show a reduction in the exposure to the most pro-cyclical sectors, which has been visible in stable aggregate default levels in both portfolios. Banks’ profitability increased somewhat in the past few quarters, while their capitalization levels have remained stable.
But mindful of the old Chinese proverb that ‘He who lives by the crystal ball will die from eating broken glass’ I will stick to interpreting what’s happening in the economy right now. I’ll focus on two issues: first, what’s happening to inflation? And second, why has unemployment risen? Over the past couple of years, the headline rate of inflation has been pushed about by sharp movements in energy prices. Back in the autumn of 2004, CPI inflation was closer to 1% than the 2% target. A year later it had risen to 2.5%. It then fell back below target until the spring of this year, when it moved back up to around its present level of just below 2.5%. The first spike in inflation above the target – in the autumn of 2005 - corresponds with the very sharp rise in petrol prices around the time of hurricane Katrina. The second upward movement corresponds with the big jump in domestic gas and electricity prices this spring. This autumn petrol prices have fallen back sharply from their August peak. But CPI inflation has scarcely changed. Why? The simplest explanation is that the recorded inflation rate is still being boosted by high utility prices, and the effect of lower petrol prices has been partly offset by high seasonal food prices and the introduction of university tuition fees. Any broader-based pick up in inflation has been relatively small. Of course, life is not quite that simple.