Inflationary Pressures build in UK

Despite the recent fall in UK CPI inflation to 2.8% there is evidence of increasing underlying inflationary pressures in the UK.

• Growth last year upgraded to 2.9% (Source: office of national statistics)
• OECD raise forecast growth rate to 2.7% (slightly higher than the UK's long run trend rate of growth)
• Rising wage settlements (2% in the last quarter)
• Wages are rising, especially in the financial sector, where bonuses are at the highest since the early 1990s.
• GDP deflator rose to 3.2% in the last quarter. (this is a measure of price rises and is used for converting nominal GDP statistics into real GDP statistics)

• Guide to Interest rates
• Prospects for Inflation in 2007
• Inflation explained
  

UK January Inflation figures good news for homeowners

The latest CPI inflation figures released by the bank of England show that the main inflation rate was 2.7% in January. This is a fall of 0.3% on the December figures.

However the old method of calculating inflation, the RPI was 4.2%. This higher inflation figure is mainly because it includes mortgage interest payments. The latest RPI inflation figures are high because they include the recent quarter point rise in inflation.

The main downward pressures on inflation this month are from falling petrol and fuel prices. Also some communication costs and airtravel is lower than this time last year.

The effect of a lower inflation rate means that there is less necessity for an interest rate increase in the near future. With the Bank of England Governor claiming that inflation is likely to fall in the second half of the year it is even possible that the interest rate cycle has peaked.

However there are still inflationary pressures in the economy. These are coming from a resilient housing market and strong economic growth. GDP growth is currently 3% which is slightly above the long run trend rate of growth.

Bank of England Video on Money

Bank of England have a video about the usefulness of money. (would make a good video for my AS economics students) Pretty down to earth for the Bank of England.

"It would be pretty hard to buy a CD if you didn't have any money"

Via: UK Economics

The bank have been given a target for Inflation of CPI 2% =/-1 Inflation does have many costs such as uncertainty, confusion and "Menu Costs". Chancellor Norman Lamont famously said in 1991 or 1992

"Unemployment is a price well worth paying for lower inflation". It caused a bit of a storm at the time, there were nearly 3 million people unemployed. However you could argue that since inflation has been reduced since the late 80s boom the UK has experienced a remarkably stable period of economic growth, consistent with low inflation. Maybe reducing inflation was a necessary evil. The MPC approach since then has to be pre emptive. I.e. reduce inflation before it becomes a real problem. The hope is that this makes it less painful to reduce.

However on the other hand Central bankers can sometimes get carried away by low inflation. For example in the 1990s the Japanese financial authorities still had concerns over inflation despite persistent deflation and a stagnant economy.