Inflation Alert from the ONS (gosh, is that meant to be a surprise?)
Posted by markharrison on June 17, 2008
The Office of National Statistics has, today, announced what we all actually knew – namely that inflation is well ahead of the Government’s 2% target.
In fact, it’s currently running at either 3.3%, or 4.3% depending on which measure you take (the lower is the CPI, the higher the RPI.)
Leading the rise were food and non-alcoholic drinks, with energy bills and holidays also edging up (but DVDs still coming further down.)
The figure of 3% in the CPI is critical – the target set by the Government is 2%, and if the figure hits 3%, then the Bank of England have to write a letter to the Chancellor explaining the problem. The letter he’s written says that inflation will probably hit 4% by the end of the year, but then come back down again unless there are what Mervyn King (BoE Governor) calls “unexpected increases in oil and commodity prices.”
This, of course, begs the question, what expected increases are there going to be. I don’t see anyone predicting anything other than a continual upwards move in oil prices. (As a personal note, we got rid of the Bentley, which was costing well over £100/tank, and as of last Thursday are driving an LPG Volvo, and filling up at 61.9p per litre LPG prices!)
Of course, while house-price inflation is in some circumstances good for property investors (because you can take advantage of the Money Illusion), general inflation is generally bad news – the higher inflation goes, the more likely the BoE are to raise interest rates. Given that market rates are already a long way above BoE rates (compared to the last 20 years), you could argue that much of the impact of BoE changes has already disappeared – but them putting UP the rates is more upward pressure on mortgage rates.
Of course, in the long term, that’s good for smart investors – because it will push out of the market all the naive “passive income B2Lers” – leaving the market less crowded for sophisticated investors… but that’s a longer-term advantage, wheras next month’s mortgage bill will need paying, well, next month.
Photo credit: http://www.flickr.com/photos/gforce/207322823/ Copyright Graham McLellan, used under a Creative Commons licence