Will Inflation Rise Affect Future Interest Rate Cuts?
This January saw British factory gate inflation rise to its highest rate in more than 16 years. As a result fears have now sparked amongst the financial markets that the Bank of England will reconsider any further cuts in the interest rate that were expected to take place.
Figures from the Office of National Statistics revealed that producer price inflation rose 1% for the month in January pushing the overall annual rate up to 5.7% from a previous 5% in December. The expected annual reading had been predicted at 5.1% according to a source of analysts.
Although the Bank of England cut interest rates by a quarter point last week to 5.25%, it is believed any further cuts will depend on whether or not the Bank can keep inflation under control.
Before last week's rate cut Mervyn King, Governor of the Bank of England, warned that inflation may well rise 1percentage point above the Bank's 2% target over the course of the year 2008. If this happens he would then be required to write a letter to the Chancellor of the Exchequer providing a full explanation.
The Bank of England's Monetary Policy Committee is faced with the difficult task of ensuring that inflation is kept under control while ensuring that rates are kept sufficiently low to stimulate the slowdown within the property market and flagging economy.
Investec economist Philip Shaw said, "We had been expecting a further increase in output price inflation, but these figures are unequivocally awful."
While producer output prices were substantially pushed up by higher fuel and food prices, the core rate still spiked up to 3.2 per cent from 2.7 per cent in December and 2.4 per cent in November, the fastest monthly rate since records began in 1986.
Input price inflation, the cost of materials to producers, rose to 18.9% on the year in January, likewise the strongest rate since the series began 22 years ago.
Crude oil prices also rose 70.3% on the year in January, the highest rate in almost 8 years, while domestic food prices increased by a record high of 36% on the year.
Additional data provided by Connells, the UK's 2nd largest estate agency network, revealed that last month's mortgage approvals proved to be the weakest January since Bank of England records began in 1994.
Mortgage volumes rose 3% to 75,300 from December's record low; however the Bank of England would need to make further rate cuts in order to restore confidence across the entire market.
Official figures from the Department for Communities and Local Government (DCLG) have shown that annual house price inflation fell to a 12 month low of 9.1% in December, from 9.7% in November and a 28 month high of 12.3% in July.
Analysts at Global Insight predict house prices to fall by an average of 5% both this year and next. Meanwhile the UK's two largest building societies, Halifax and Nationwide, predict that house prices will be flat on average during 2008 and maintain hopes of further interest rate cuts.
Published on February 12, 2008
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