UK Inflation Tests BOE (WSJ)

inspector_monkfish

05:10 19May10 (WSJ) Heard On The Street: UK Inflation Tests BOE


The markets have grown used to U.K. inflation surprises, so perhaps Tuesday's muted reaction to official figures showing that consumer prices rose at an annualized rate of 3.7% in May, well ahead of the consensus forecast of 3.5%, was to be expected.

U.K. government bonds barely budged. Even so, the persistence of U.K. inflation risks damaging the credibility of the Bank of England, which only last week produced a dovish inflation report. Unless inflation falls sharply and quickly, the BOE will be forced to raise interest rates this year.

Retail-price inflation was 5.3%, the highest since 1991. Core inflation,
excluding energy and food, hit 3.1%, led by sharp rises in clothing prices,
suggesting inflation may not come down as fast as the BOE expects once one-time factors pass through. Rising core inflation raises questions about the accuracy of the BOE's inflation model. As Fathom Consulting points out, U.K. gross domestic product is 12% lower than the BOE forecast in November 2007, while inflation is 2.5 percentage points higher.

There's little sign these misses are fueling inflation expectations, easing the pressure for any immediate rise in interest rates. The BOE is betting the new U.K. government's deficit-reduction plans will bear down on growth and inflation, enabling it to keep monetary-policy conditions easy. But unless inflation falls sharply this summer, investors may fear the BOE is deliberately ignoring the risks.

mitchaa

It's not going to happen anytime soon though.

VAT upto 20% will send inflation rocketing 1-2% on top of those figures.

inspector_monkfish

inspector_monkfish wrote: »

05:10 19May10 (WSJ) Heard On The Street: UK Inflation Tests BOE


The markets have grown used to U.K. inflation surprises, so perhaps Tuesday's muted reaction to official figures showing that consumer prices rose at an annualized rate of 3.7% in May, well ahead of the consensus forecast of 3.5%, was to be expected.

U.K. government bonds barely budged. Even so, the persistence of U.K. inflation risks damaging the credibility of the Bank of England, which only last week produced a dovish inflation report. Unless inflation falls sharply and quickly, the BOE will be forced to raise interest rates this year.

Retail-price inflation was 5.3%, the highest since 1991. Core inflation,
excluding energy and food, hit 3.1%, led by sharp rises in clothing prices,
suggesting inflation may not come down as fast as the BOE expects once one-time factors pass through. Rising core inflation raises questions about the accuracy of the BOE's inflation model. As Fathom Consulting points out, U.K. gross domestic product is 12% lower than the BOE forecast in November 2007, while inflation is 2.5 percentage points higher.

There's little sign these misses are fueling inflation expectations, easing the pressure for any immediate rise in interest rates. The BOE is betting the new U.K. government's deficit-reduction plans will bear down on growth and inflation, enabling it to keep monetary-policy conditions easy. But unless inflation falls sharply this summer, investors may fear the BOE is deliberately ignoring the risks.

i don't know exactly when, but i predict it will happen on a thursday......

lemonjelly

inspector_monkfish wrote: »

U.K. government bonds barely budged. Even so, the persistence of U.K. inflation risks damaging the credibility of the Bank of England, which only last week produced a dovish inflation report. Unless inflation falls sharply and quickly, the BOE will be forced to raise interest rates this year.



There's little sign these misses are fueling inflation expectations, easing the pressure for any immediate rise in interest rates. The BOE is betting the new U.K. government's deficit-reduction plans will bear down on growth and inflation, enabling it to keep monetary-policy conditions easy. But unless inflation falls sharply this summer, investors may fear the BOE is deliberately ignoring the risks.

Would it be too much of a tin hat conspiracist idea to wonder whether our Merv has an idea what georgie porgie has planned?:eek:

michaels

As I said on the inflation thread yesterday there is 'an understanding' in the markets that inflation will be used to handle the debt overhang (and if it can be controlled then it is almost certainly a more attractive option than default).

However there would be a tipping point where expectations that it can be controlled instead become expectations that a wage price spiral has started in which case govt bond yields might move up very sharply. This would not be a funding crisis like the Greeks are suffering as it would not be the default risk premium driving the increase in yields. Rather the inflationary expectations would lead to a desire to keep real returns positive which being a purely nominal phenomenon should not impact on default risk. Of course for the economy that means more of the traditional stop-go cycle behaviour than the current credit driven recession.

maveli

inspector_monkfish wrote: »

i don't know exactly when, but i predict it will happen on a thursday......

wasn't last big drop on a Wednesday ?

inspector_monkfish

maveli wrote: »

wasn't last big drop on a Wednesday ?

no, it was a thursday