UK CPI Inflation Breaks Above Bank of England's Upper 3% Limit

By: Nadeem_Walayat

The UK Consumer Price Index rose to 3.3% for May 08 above the consensus forecasts of 3.2% pushing inflation to a 11 year high on the back of a surge in import and producer prices. Surging inflation not only puts a hold on further UK interest rate cuts but opens the door to what can only be construed as panic rate hikes later in the year to prevent a wage price spiral from taking hold and pushing the UK economy into stagflation.

The Bank of England Governor warned in recent weeks that inflation would break above 3% and target 4% later in the year before coming back down during next year. However that optimistic view holds that wages will be kept in check whilst prices rise and that the current food and fuel inflation will filter out of the annual indices implying that further price shocks won't follow during 2009.

Sterling slumped on the news, falling from £/$1.97 to £/$1.95, the weakening currency in itself builds future inflationary pressures that has seen the Pound fall from 1.50 to the euro to 1.25 over the past 12 months.

Meanwhile the UK housing market continues to drag the rest of the economy lower, just as the Bank of England is being forced into keeping rates on hold and thereby the slump in the housing market is expected to intensify. Whilst the UK is expected to avoid a recession this year with growth on target to meet 1.3%, the second half of 2009 could see the UK slip into recession as measured by 2 quarters of negative growth.

By Nadeem Walayat

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