MSE News: Record inflation hike: could interest rates soon rise?

mitchaa

Silly question....

If inflation is increasing and the BOE whacks up interest rates, isn't this going to put inflation up even more as mortgage costs for millions increase?

ILW

mitchaa wrote: »

Silly question....

If inflation is increasing and the BOE whacks up interest rates, isn't this going to put inflation up even more as mortgage costs for millions increase?

I believe CPI does not include mortgage interest, or is that RPI? Correct me if I am wrong.

StevieJ

Sir_Humphrey wrote: »

The VAT increase and train fare increases came in Jan 2010 - so assuming the inflation figures are by calender month they will not affect the December inflation figure.

The VAT decrease came in December 2008 so the year on year figures are comparing 15% with 15% whereas previous months it was 15% with 17.5% . I assume we will get another effect in Jan of 17.5% compared to 15%.
That is my understanding, could be wrong though.

Jonbvn

Time for some index linked saving certificates methinks. BTW, RPI went from below -1% in Sept to above +2% in December. I.e. 3% in 3 months!!!

StevieJ

Jonbvn wrote: »

Time for some index linked saving certificates methinks. BTW, RPI went from below -1% in Sept to above +2% in December. I.e. 3% in 3 months!!!

Then again last year it dropped from 5% to 0.9% over the same period, -4.1%.

Sir_Humphrey

chucky wrote: »

the November Bank of England inflation report, it's assuming £200b of QE.

they only seem to produce these projections every few months. August was the previous one.
http://www.bankofengland.co.uk/publications/inflationreport/ir09nov.pdf

The chart is one of the BoE's famous fan charts. They express the confidence intervals of the inflation forecast (in other words they show the margin of error, e.g x% certainty). This margin of error obviously gets larger as time progresses as you would expect.

The darker part of the chart shows the most likely outcome (the central projection), and the lighter parts show possible, but unlikely outcomes.

I cannot recall what the actual intervals are on these charts (and in a seminar I once attended, a hawkish member of the MPC couldn't recall off the top of his head either).

The wide margin of error goes to show how difficult it is to make decisions, as all statistical forecasts have these margins of error. The same applies to any forecasting, from the weather to GDP growth.

Really2

StevieJ wrote: »

The VAT decrease came in December 2008 so the year on year figures are comparing 15% with 15% whereas previous months it was 15% with 17.5% . I assume we will get another effect in Jan of 17.5% compared to 15%.
That is my understanding, could be wrong though.

Spot on, it took me a bit to get my head round it this morning.

So Dec 08 was a drop because it was a 17.5% down to 15%.
Dec 09 increased because it was a 15% compared to 15% (but a drop against a rise in inflation)
Jan 2010 will be an increase because it will be 17.5% against 15%

DaddyBear

Next months figures will be eye watering with VAT taken into account.
No more QE for a while (one would hope) and increases the chance of interest rate rises.
Also puts the recent rises in house prices into context.

Generali

Sir_Humphrey wrote: »

The VAT increase and train fare increases came in Jan 2010 - so assuming the inflation figures are by calender month they will not affect the December inflation figure.

The explanatory note is interesting, suggesting that the sharp rise is due to deflation the previous December. Also note the "housing depreciation" AKA HPI comment.

The fact that inflation has increased is evidence IMHO that the economy is expanding again after QE. I doubt inflation would occur unless the economy were growing.

I doubt this will influence the BoE MPC yet, but if this turns out to be a trend rather than a statistical blip, I think we can expect the MPC to be playing interest rate catch-up by late spring and early summer. Wait and see.

It may not be inflation however but a one-off jump in prices caused by the devaluation of the pound. Inflation is a persistant tendancy for prices to rise, not a one-off change.

Given that UK GDP fell by over 5% and unemployment is well over 2,000,000 it's pretty unlikely that supply of labour or goods constraints is causing this rise in the CPI.

That the recession is over seems likely. If so, it's quite possible that growth will be pretty high for a quarter or two (although presumably Q1 2010 will be depressed by bad weather). My guess is that sustained growth is unlikely due to the lack of investment in British companies over the past 18 months. I heard someone from RBS today saying that Corporates had net repaid £8,000,000,000 (ie repayments - new/rolled over borrowing = £8,000,000,000) to them alone last year!

obsessed_saver

Mmm. What were they expecting by pumping money into the economy? Their answer to debt, is more debt.