Inflation

By Ben Yearsley | 24 Sep, 2008 

A figure largely overlooked during the turmoil in world stock markets recently is that of UK inflation. August inflation figures were released and the Consumer Price Index (CPI) unsurprisingly showed a rise, to 4.7% up from 4.4% the previous month. This is way above the government’s 2% annual inflation target. The Retail Price Index August figure was also released but this showed an unexpected fall from 5% to 4.8%. 

Both these figures are high in the context of the last decade, but it is likely they will drop over the next year or so. We have already seen oil fall from $145 a barrel and prices for food and raw materials have also fallen.

The primary concern of the Monetary Policy Committee (MPC) is controlling inflation, so interest rates are set with reference to that. Currently, although the economy badly needs an interest rate cut, the MPC cannot cut rates whilst inflation is high. An easing of inflation over the next year, as many suggest, would give scope for rate cuts maybe in the region of 1% or more. These prospective cuts should provide some respite for the UK economy.

Mortgage rates are more closely linked to the London Inter-Bank Offer Rate (LIBOR) than the Bank of England Base Rate. LIBOR is the rate at which banks lend to each other. Currently, due to the credit crunch, banks are nervous about lending to each other so LIBOR is much higher than the official Bank of England base rate. When confidence returns to the banking system mortgage rates should start to fall.