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ONS Makes inflation calculation blunder !

Interest-Rates / Inflation Sep 28, 2006 - 04:00 PM GMT

By: Phillipa_Green

Interest-Rates The Office for National Statistics has made a serious error in its inflation data, which will impact on expectations for further interest rate hikes and pushed the pound sharply lower.

The ONS admitted that it had found a mistake in its computer models. As a result, it cut its estimate for overall inflation for goods and services produced by local companies and government, the so-called GDP deflator, to 2.2% from 3.4% in the second-quarter. It also lowered its estimate for annual inflation in export prices to 0.6% from the original 3.8%. The revisions showed that actual U.K. inflationary pressures are far tamer than originally thought.

ONS officials explained that an error occurred when they were trying to correct the impact of value-added tax (VAT) fraud on trade statistics. "This activity has long bedeviled the monthly goods trade figures but an attempt to correct the problem in the national accounts made it look like exporters had easily raised their prices in the global marketplace," said Paul Guest, senior economist at Moody's in London. "The end result was lower nominal GDP growth than everyone, including the Bank of England, initially thought." The ONS lowered its estimate for growth in national income to 4.8% from a prior 6.0%.

The Bank of England had highlighted fast growth in national income as a serious concern in the minutes of its latest monetary-policy meeting. "Annual growth in nominal GDP had been increasing and was now estimated to be 6%, a level consistent with average inflation a little higher than its target," it had said.

The ONS also released data on the balance of payments. The current account recorded a deficit of 6.986 billion pounds, smaller than forecasts for a deficit of 8.0 billion pounds. which is equivalent to 2.2 percent of GDP.

This decreases the probability of future rises in interest rates, but we will need to see how the money markets react, which had been discounting a rise in November 06.

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