UK CPI Inflation Explodes Higher to 5.2%

By: Nadeem_Walayat

The inflationary spike higher continued on release of September's inflation data which saw the CPI measure burst through 5% to hit 5.2% from 4.7% the month before. CPI crossed above the RPI inflation measure for the first time in 7 years which now stands at 5%, as the below graph illustrates.

However inflation data is lagging the real economy by between 5 and 8 months and does not yet reflect the sharp slowdown of the UK economy over the last 3 months, nor is the impact of the fall in oil prices from $147 to $80 over the last 2-3 months. Therefore this implies inflation data will start to become muted in the coming months in advance of a similarly sharp drop on par with the spike higher. On a further negative for the government September RPI data is used for indexation of pensions and benefits which is likely to cost an additional of as much as £5 billion, as well as igniting public sector demands for higher pay deals despite the onset of recession.

However as I pointed out in the UK interest rate forecast for 2009 that cuts in interest rates and bailouts will result higher inflation further out and therefore puts sterling at a risk of foreign investors starting to view the UK as a big version of Iceland. I first wrote that the Bank of England would be forced by the government to abandon inflation targeting and cut interest rates no matter how high inflation rose as long ago as in May of this year UK House Prices Tumbling- Interest Rate Conundrum. The interest rate forecast continues to imply deep cuts regardless of the rate of inflation, having been confirmed by last Thursday's panic 0.5% co-ordinated cut by the BoE, US Fed and ECB.

UK interest Rate Forecast for 2009

The Bank of England continues to forecast that UK CPI inflation will be at 2% in 2 years time, which is precisely the same perpetual forecast that the Bank of England has been making since it was assigned the 2% inflation target some 5 years ago, during which time the Bank of England has only hit its target for 5 months or 8% of the time, just as the Bank of England 2 years ago was forecasting that UK inflation would be at 2% for September 2008 when it is clearly far from 2%.

Some in-experienced mainstream television commentators are mistakenly stating that prices will fall in the near future. That is incorrect the rate of overall prices rises will reduce, but we are not heading for falling prices as both the currency factor and the huge explosion in government borrowing due to the extra debt burden of £500 billion banking system bailout would cost the tax payer approx £25 billion a year in extra interest which effectively nearly doubles the countries official government debt of £590 billion which tends to exclude in what can be termed as creative accounting other public sector debt, such as un-funded public sector pension liabilities of more than £800 billion with other hidden debt totaling £100 billion would put real UK public debt at some £2 trillion or some 160% of annual GDP which is far above the governments official limit of 40% of GDP. However economic contraction will shrink UK GDP and hence the gap between spending and income will be again be filled by more debt. Therefore we could see public debt rise to as much as 100% of GDP and if the hidden debt is included, a rise to 200% of GDP. This is highly inflationary and is the primary reason for the relative weakness of sterling, as real returns turn further negative (inflation minus base rate = -0.70%).

My UK CPI inflation forecast covering the anticipated trend for the next 12 months will be published within the next 2 weeks, in advance of the UK Housing market forecast for the next few years as an update to the existing forecast as of August 2007.

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

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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing 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

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