Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20
THE STOCK MARKET BIG PICTURE - Video - 19th Nov 20
Reasons why Bitcoin is Treading at it's Highest Level Since 2017 and a Warning - 19th Nov 20
Media Celebrates after Trump’s Pro-Gold Fed Nominee Gets Blocked - 19th Nov 20
DJIA Short-term Stock Market Technical Trend Analysis - 19th Nov 20
Demoncracy Ushers in the Flu World Order How to Survive and Profit From What Is Coming - 19th Nov 20
US Bond Market: "When Investors Should Worry" - 18th Nov 20
Gold Remains the Best Pandemic Insurance - 18th Nov 20
GPU Fan Not Spinning FIX - How to Easily Extend the Life of Your Gaming PC System - 18th Nov 20
Dow Jones E-Mini Futures Tag 30k Twice – Setting Up Stock Market Double Top - 18th Nov 20
Edge Computing Is Leading the Next Great Tech Revolution - 18th Nov 20
This Chart Signals When Gold Stocks Will Explode - 17th Nov 20
Gold Price Momentous ally From 2000 Compared To SPY Stock Market and Nasdaq - 17th Nov 20
Creating Marketing Campaigns Using the Freedom of Information Act - 17th Nov 20
ILLEGITIMATE PRESIDENT - 17th Nov 20
Stock Market Uptrend in Process - 17th Nov 20
How My Friend Made $128,000 Investing in Stocks Without Knowing It - 16th Nov 20
Free-spending Biden and/or continued Fed stimulus will hike Gold prices - 16th Nov 20
Top Cheap Budgie Toys - Every Budgie Owner Should Have These Safe Bird Toys! - 16th Nov 20
Line Up For Your Jab to get your Covaids Freedom Pass and a 5% Work From Home Tax - 16th Nov 20
You May Have Overlooked These “Sleeper” Precious Metals - 16th Nov 20
Demystifying interesting facts about online Casinos - 16th Nov 20
What's Ahead for the Gold Market? - 15th Nov 20
Gold’s Momentous Rally From 2000 Compared To Stock Market SPY & QQQ - 15th Nov 20
Overclockers UK Quality of Custom Gaming System Build - OEM Windows Sticker? - 15th Nov 20
UK GCSE Exams 2021 CANCELLED! Grades Based on Mock Exams and Teacher Assessments - 15th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

UK Inflation Forecast 2008 (RPI and CPI)

Economics / Inflation Nov 26, 2007 - 12:01 AM GMT

By: Nadeem_Walayat

Economics

Best Financial Markets Analysis ArticleThe recent up tick in UK inflation has sparked inflation concerns to continue going into 2008. However the Market Oracle anticipated the recent up tick as a consequence of money supply growth earlier in the year as an indicator of future inflation and that the up tick would prove temporary as many factors converge towards deflationary pressures during 2008 that will allow the Bank of England to start cutting UK interest rates towards a target of 5% before the decline in UK inflation starts and for UK inflation to subsequently fall towards the Market Oracle targets of 3% RPI and 1.8% CPI towards the end of 2008.

The following analysis presents some of the key factors that will result in the fall in UK Inflation during 2008.


UK Money Supply M4

UK Money Supply M4

The anticipated trend in Money supply growth continues to moderate from the high levels of 14% plus towards a trend to below 10% as per the analysis of 18th Sept 07. Money supply is an important contributory indicator for future inflation between 6 and 12 months forward. Hence money supply growth near 14% during mid 2007 was expected to result in higher inflation in the immediate future going into 2008 (22nd August 07).

The expectation is that the inflationary surge will conclude by the start of 2008 and that despite higher inflation, the Bank of England will take the drop in M4 to below 10% as a better indicator for future inflation than the most recent inflation data would suggest at that time and therefore start cutting UK interests in line with the Market Oracle forecast for the first cut to occur in January 2008.

UK Housing Affordability and Credit Crunch Deflation Impact During 2008

UK Housing Affordability and Credit Crunch Deflation Impact During 2008

The uptrend in UK house prices since late 2005 has not been sustainable and is purely a consequence of the cheap credit environment that evaporated during August 2007. This is already resulting in the first fall in UK house prices for several years which is expected to accelerate going into 2008. As house prices decline, this will have a deflationary effect on the UK economy as consumers will tend to spend less due to the impact of higher costs of servicing properties, reduction in equity withdrawals for consumption and a much tougher credit environment.

Reduction in equity withdrawals are already being observed with the number of approvals falling from 48,000 12 months ago to 38,000 for October 07. There has been an even sharper fall in the number of loans for house purchases which has dropped from 70,000, 12 months ago to 44,000 today (Source BBA). These are indicators of sharp slowdown in the UK housing market that is to be followed by an increase in repossessions on the 2007 figure by some 100% towards a target of 80,000. The consequence of this is for a UK house price deflation of 15% over 2 years as of the analysis of 22nd August 07.

The impact of the credit crunch is expected to continue well into 2008. The effect of which is most clearly observed in the 3 month interbank lending rate which again this week surged to above 6.5%. It is this rate and not the BoE base rate that determines your overall mortgage costs. During much of the housing boom the interbank rate would tend to signal rises and falls in UK interest rates by discounting falls and leading rises. However the freeze in the interbank money markets has led to a state where the money markets are trading at a 0.75% premium to the base rate despite increasing expectations for a cut in UK interest rates. This is due to the mortgage lenders increased perceived risks of default on loans and therefore the requirement of a premium over the base rate. The effect of which is equivalent to a rise in base rates to at least 6% and therefore the credit crunch has a very strong deflationary effect on the UK economy and will continue to do so despite cuts in UK base rates during the whole of 2008.

The reason again is the global nature of the credit crunch which is as a consequence of the US subprime mortgage meltdown as mortgage interest rates adjust to much higher rates than those originally fixed at during 2005 and 2006. How this effects UK banks is due to the way the subprime mortgage debt was sliced and diced and packaged and sold with other debt across the world as CDO's/ Which now makes it difficult for banks the world over to value their whole CDO packages and therefore the market for the CDO's has become frozen. It is unlikely that anything can be done to unfreeze the credit markets until the banks have been able to value the debt packages and make the appropriate bad debt provisions. Therefore conditions for the UK housing market can only become tighter as we have our own variety of subprime mortgages that are expected to blow-up during 2008 namely the buy to let market.

US Dollar Devaluation

With dollar denominated commodity prices on the rise, you may wonder why a falling dollar is deflationary for the UK economy. Well there are several deflationary consequences of a falling dollar for the UK.

1. That an estimated 25% of earnings from our biggest are in US dollars and therefore the corporate sector is expected to be squeezed which will result in lower corporation tax revenues and thus impact on the UK economy.

2. The Chinese are still maintaining the overall policy of pegging the Yuan against the US dollar. This means that as the US dollar drops so do the price of goods chinese will continue to get cheaper in terms of the British Pound and other currencies that are not pegged to the falling dollar. So China will again be exporting deflation abroad (mostly to Europe) and importing part of the UK's inflation.

3. US Goods and Services become cheaper and therefore the UK will enjoy a deflationary effect as the US current account deficit corrects itself. But at the same time UK goods and services are becoming more expensive to the US market and therefore again have a deflationary effect on the UK corporate sector.

Off course at some point the above trends will impact on sterling, as the UK economy slows and interest rates are cut. This is most likely to occur as the US interest rate cutting cycle comes to an end, which will probably be some time during the second half of 2008.

US Dollar Devaluation

The British Pound looks set to maintain its uptrend against the falling US Dollar. At the current rate of advance and allowing for significant corrective action during the year. The British Pound is targeting a trend towards £/$ 2.25 by October 2008. Which would imply a further 10% dollar devaluation on the current exchange rate.

UK Inflation Trend Forecasts

UK Inflation Trend Forecasts

The current up tick in inflation is expected to terminate early 2008, probably by the release of the January statistics, after which the trend is expected to resume lower with trends forecasting a sharper fall for the RPI than the CPI. RPI is forecasting a trend towards 3.2% and the CPI is forecasting a trend towards 1.9% by September 2008. Additionally UK Interest rates also target downtrend towards 5% by the same timeframe.

Conclusion : Inflation Forecast 2008

Despite the current upward trend continuing into the immediate future, UK Inflation as measured by the RPI is expected to fall sharply to or below 3% by November 2008 (current 4.2%). The CPI is expected to fall to 1.8% by November 2008 (current 2.1%). This takes into account the above analysis as well as anticipated fall in GDP growth to significantly below the governments forecast of 2.5%, moderating energy prices and continuing deflationary effect of migrant workers which help to cap wage demands.

What to do about falling UK inflation ?

1. Fixed Rate Savings and Bonds - Lock in higher interest rates amongst Fixed rate savings products which currently range between 6.3% and 6.75% today as a consequence of the credit crunch. Remember to fully utilise your ISA TAx Free Savings Accounts Annual Allowances which on an 6.5% rate are equivalent to a 9% gross return for a higher rate UK tax payers.

Also UK Gilts are expected to continue the up trend as yields continue to fall.

2. Lower inflation implies lower commodity prices and therefore those sectors that benefit from higher commodity prices may see a retracement at least in sterling terms.

3. Invest in Overseas Growth

Global Stock Markets P/E Ratio Analysis

Your portfolio should aim to be invested in companies with exposure to high growth countries which have not become too far overvalued. The recent analysis of 18th November 07 highlighted the markets most likely to perform well during 2008 as indicated by the above chart.

By Nadeem Walayat
Copyright (c) 2005-07
Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of analysing and trading the financial markets and is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 100 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jen
26 Nov 07, 09:40
Inflation

What would happen to your inflation forecast if crude oil takes off to well beyond $100 ?


Dr Labratt
23 Apr 08, 04:37
Crude Oil Price Inflation

The price of crude oil is set to continue rising (due to supply constraints and demand issues), irrespective of what this type of analysis claims. This will have an inflationary effect on the price of most consumer goods. A point will probably be reached where the high price reduces some demand and it may stabilise for a short while. Ultimately, however, we are living in dreamland if we think the crude oil price rises are temporary.

The credit problems being experienced at present are probably not long term, but have deep seated roots. The trick is knowing when the housing market will commence recovery. If you bought your home to live in and can service the mortgage it's not a huge worry - as it will get better.

Contrary to popular belief, rising oil prices and other similar 'crises' are not a doomsday scenario. Ultimately the market (which is inherently cyclical) will recover. Solutions will be developed to the rising price of crude, but they will take time and will rely upon the price of oil continuing to rise.

For the 'man and woman' in the street the rules are the same as they've always been. Plan ahead. Try and get some savings together, keep the cupboards stocked up and increase your range of skills and knowledge - so that you are more attractive to employers and so that you are able to limit your revenue spending.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules