Tuesday, May 17, 2011

After One Month Respite, UK Inflation Bubbles Anew - Up to 4.5%

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After experiencing the first month over month decline since July 2010 last month, April UK inflation has done a 180 and sprinted ahead 0.5% versus the 4% reading in March.  With Mervyn King calling inflation "transitory" for nearly 18 months now, one must hope the recent collapse in commodities will help push this figure down next month.  That said, companies who pushed across price increases might be happy to keep the extra margin for themselves that any lower input costs create.

This should continue to put pressure on the BOE to raise rates by the end of 2011, leaving only the U.S. and Japan as easy money crack dealers.  Further, it appears barring oil falling back to $50-$70, the UK seems headed for at best stagflation or at worst, outright recession in 2012.  Recall, the country did a real austerity plan unlike the hand waving we are doing here. [Oct 21, 2010: United Kingdom Unveils Serious Austerity Measures - Potential Slashing of Half a Million Government Jobs]

(for newer readers, I like to highlight the UK as I believe it loosely aligns with what is happening in the U.S. if we more accurately measured our inflation - excluding the effects of the VAT tax)

Via Bloomberg:

  • U.K. inflation accelerated more than economists forecast in April to the fastest since October 2008, forcing Bank of England Governor Mervyn King to explain publicly why officials haven’t raised interest rates yet.  Consumer prices rose 4.5 percent in April after a 4 percent increase in March, data today showed. The median forecast of 32 economists in a Bloomberg News survey was 4.1 percent. 
  • CPI is now at its highest level since October 2008.
  • Core inflation quickened to the fastest in at least 14 years. King said in a letter to Chancellor of the Exchequer George Osborne that the surge is being driven by higher sales tax and increases in energy and import prices.
  • So-called core inflation, which excludes costs of energy, alcohol, food and tobacco, quickened to 3.7 percent, the fastest since records began in 1997, from 3.2 in March. The same factors driving the headline rate fueled core prices. 
  • The pound rose after the Office for National Statistics reported the inflation data. While King said inflation is likely to rise further in the next few months, he sees it easing toward the bank’s 2 percent target next year. The central bank signaled last week it may need to raise the key interest rate from a record low to control “uncomfortably high” price growth.  Investors are betting on a quarter-point rate increase in December, according to forward contracts on the sterling overnight interbank average.
  • Retail-price inflation, a measure of the cost of living used in wage negotiations, slowed to 5.2 percent in April from March’s 5.3 percent. On the month, prices by that measure increased 0.8 percent.   Excluding mortgage costs, retail-price inflation was 5.3 percent. 


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