Yesterday the 'official' measure of UK inflation the Consumer Price Index (CPI) fell from 2.5% to 2.4%, and thus trending in the right direction towards the 2% target after a scare earlier in the year when the CPI breached the upper limit of 3%, prompting the Governor of the Bank of England to write a letter to the former Chancellor Gordon Brown explaining why the Bank had failed to control inflation.

So if inflation has continued to fall from 3.1% to 2.4% , then why is this articles title suggesting further rises in UK interest rates ?

Simply put, the CPI measure is not as an important indicator of inflation in the economy despite being the preferred measure for inflation. Taking UK inflation trends as a tight three part story, where the CPI Index plays second fiddle to the Retail Prices Index which actually rose from 4.3% to 4.4% against expectations of a fall to 4.2% and the key indicator of future inflationary pressures, the money supply expansion (M4) which on the last figures rose to an annualised rate of 13.9% (below).

The strong upward trend in the money supply indicates that a further interest rate rise is likely to 6%, with the most probable date for the next rise in UK interest rates to be at the October MPC Meeting. Given the continuing upward trend, it is a little early to call 6% as the probable peak, especially since the rate rises to date have so far failed to have any significant impact on the UK housing market.

	Bank of England Expected to Raise Interest Rates to 5.75pcent Thursday - July 07
	UK CPI Inflation rate falls but RPI will ensure further rise in UK Interest Rates - June 07
	Inflation report confirms further rise in UK Interest rates to 5.75% - May 07
	UK strong house price growth signals further rises in interest rates - March 07
	UK Interest Rate forecast for 2007 - Bank of England to do battle with inflation - Dec 06
	UK Interest Rates could rise to 5.75% in 2007 - Nov 06
	Interest Rates Correction is Over - March 2006
	UK Long-term Interest Rates Trend is still UP ! - Nov 2005

By Nadeem Walayat
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Nadeem Walayat Archive

Comments

Helen
18 Jul 07, 08:15

Money Supply causes inflation

It is clear that the supply of money causes inflation, but you never hear anything about this on the media or from the government.

Why the silence ?

House prices tripling, inflation rising, all caused by the increase in the money supply.

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