Tuesday, July 17, 2007
Mixed inflation news
Posted by David Smith at 10:00 AM
Category: Thoughts and responses

Consumer price inflation edged down towards the 2% target, dropping from 2.5% to 2.4%, but retail price inflation was up from 4.3% to 4.4%, boosted by higher mortgage rates, and RPIX (the retail prices index excluding mortgage interest payments) was unchanged at 3.3%. The Bank will be pleased to see CPI inflation falling but concerned at elevated core inflation - 2% - and the other measures. Further details here.

Comments

Well the June inflation out this morning figures do not make good reading. The headline CPI figure was down as expected, but this was due almost entirely to falling domestic energy costs.

The following annual price rises look grim:
Food +4.8%
Alcohol +3.4%
Furniture and household goods +3.8%
Health +3.4%
Transport +3.2%
Restaurants and hotels +3.7%

With all that lot rising in price faster than the target of 2%, the target is going to be very difficult to hit.

In the last 6 months inflation in furniture has moderated and the 6 months annualised figure is now 1.4%. However, the 6 months annualised figure for all the other items listed above is still higher than the 2% target, implying that underlying inflation in these items will continue to be higher than the 2% target in the next few months.

Food is currently growing at a 6 month annualised rate of 3.6%, Alcohol at 8.1%, health at 3.7%, transport 7.9% and restaurants at 4.3%.

The sensible policy would be wait and see what the effects of the rate rises to date has been before increasing rates again. However I have a horrible feeling the hawks will get their way again and we will see another rise in rates to 6% in July or August.

In October and November inflation will take a sudden dip below 2% as the university tuition fees that were introduced last year fall out of the figures.

It will then be very difficult for the BOE to foist further rate rises on us after that point and CPI should then stay below target until May '08, even with underlying inflation at its current elevated levels. By then, if the economy and house prices slow down as expected, then lower inflation should follow and further rate rises won't be needed, although I reckon we are stuck with around 6% rates for another couple of years :-(

Posted by: Matt at July 17, 2007 11:36 AM

Futures markets fully pricing in 6.25% now compared to 6.15% from this morning.

Posted by: CHMITH at July 17, 2007 05:05 PM

I think I'd want to see the other half of the story - the July minutes - out tomorrow. There were no real surprises for the MPC in these inflation figures.

Posted by: David Smith at July 17, 2007 07:00 PM

http://inflationusa.blogspot.com/2007/07/cpi-in-uk.html

Posted by: kio at July 26, 2007 08:45 PM