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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

UK CPI Inflation rate falls but RPI will ensure further rise in UK Interest Rates

Economics / Inflation Jun 12, 2007 - 10:53 PM GMT

By: Nadeem_Walayat

Economics UK inflation as measured by the Bank of England's preferred measure, the Consumer Price Index (CPI) fell to 2.5% for May 07, from 2.8% for April 07. The rate of 2.5% is still above the banks target rate of 2%. The more widely recognised measure of UK inflation, the RPI fell to 4.3% from 4.5%, and is significantly above its original target of 3% which was abandoned in favour of the CPI measure, as clearly the CPI is more easily managed or manipulated than the RPI which shows a more significant continuing failure of the Bank to control UK Inflation.


UK interest rates, RPI and CPI Inflation

The manipulation of the CPI statistic is more clearly evident in the chart above when compared with the inflationary trend of the RPI Index, which shows itself as a more reliable indicator of future interest rate trends. The chart shows, that the RPI trend is calling for further rises in UK interest rates despite the significant dip in the CPI from 3.1% to 2.5%, which is mainly due to the continuing fall in gas and electricity prices as compared with the rises a year ago.

UK Money Supply M4 - Inflation RPI

Strong inflation in the UK economy is as a consequence of the continuing expansion of the UK money supply by the Bank of England as measured by M4. Whilst the money supply continues to expand at such high levels (13%), then we can expect inflation to continue to trend higher. The Bank understands that despite 10 years of publicity, the CPI inflation measure is not recognised by much of the UK economy when determining a reliable indicator of inflation with regards pricing and earnings.

Therefore a further rise in UK interest rates to 5.75% is still the expectation as a consequence of the high RPI measure of inflation. The next rise remains most likely to occur at the August MPC Meeting, even if the CPI continues to trend lower towards 2% over the coming months which increasingly looks likely.

Notes

Bank of England Governor Warns of another Interest Rate Rise - 11th June 07
   
Inflation report confirms further rise in UK Interest rates to 5.75% - 17th May 07

 

By Nadeem Walayat
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