UK Inflation CPI Falls But Interest Rates Set to Rise to 6% By October 2007Interest-Rates / UK Interest Rates Jul 18, 2007 - 12:56 AM GMT
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.
By Nadeem Walayat
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