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UK CPI inflation Soars to 4.7%, Paralysis at the Bank of England

Economics / Inflation Sep 16, 2008 - 08:51 AM GMT

By: Nadeem_Walayat

Economics Best Financial Markets Analysis ArticleUK CPI inflation hit 4.7%, soaring onwards and upwards towards 5%, which triggers another letter from the Bank of England Governor, Mervyn King explaining why he has again failed in the BOE's primary objective of controlling inflation to below 3%. Inflation has been driven higher by food and energy costs that despite crude oil and natural gas price falls has seen clear profiteering amongst energy and gas supply companies lifting consumer energy prices by over 30% in recent weeks which and contrary to the industries propaganda machine is not reflected in the forward gas market prices for winter 2008, therefore triggering a potential windfall tax of at least £1 billion which could be announced at the Labour party conference this week.


The fear at the heart of the Bank of England is that high inflation will ignite a wage price spiral, therefore the BOE remains paralyzed into inaction on interest rates whilst inflation remains on an upward trajectory well beyond's the banks mandate of 2% with 1% drift on either side. Even following an inflation peak later this year, the bank may be reluctant to cut UK interest rates. I have suggested over the last 5 months that there remains a distinct possibility that the Government may force the Bank of England to abandon its 2% inflation target and cut interest rates before inflation returns to the banks target zone.

My existing interest rate forecast as of August / Sept 2007 for interest rates to fall to 5% by September 2008 has now expired and therefore the interest rate forecast for 2009 is imminent to be published this week, in advance of which my inflation forecast for 2009 will be published later today.

Meanwhile the Bank of England has been busy pumping in an extra £20 billion of short-term funding as a further freezing in the inter bank money markets in the wake of Lehman's Collapse which has been rippling out across the worlds financial markets as the risk of bank defaults increase across the globe due to exposure to Lehman's sizeable $600 billion derivatives positions. In such a climate banks are not willing to lend to one another, let me rephrase that the banks are FEARFUL of lending to one another, which was reflected in a spike higher of the interbank rate to a credit crisis record of 6.75%, therefore the only short-term funding route is from the world central banks. Which may even trigger an interest rate cut in the United States as early as today from 2% to 1.75%.

HBOS was again hit by another 30%+ share price collapse, as hedge funds continue to sell the bank short towards a Northern Rock-esq collapse as I elaborated upon yesterday. Hedge Funds Target Halifax, HBOS as Shares Crash 30%

 

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 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.

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