Bank of England Inflation report and what it means for Interest Rates

Unlike the press DON’T PANIC, the economic news is good but not that good in the Bank of England Inflation report.

Reports of imminent Bank Base Rate rises next year are wildly exaggerated and unhelpful to the economy. We had one piece of good news on unemployment and the FTSE 100 took a tumble.

Let’s just start with the facts as CPI inflation is now down to 2.2% from 2.9% in June. This means we are much closer to the medium term targeted inflation than we have been since December 2009. The disclaimer in my previous article about the ONS CPI inflation data was that it did not include the recent energy price increases. However, I have since found out that these increases are actually smaller than at the same time last year so should have no effect on year on year figures.

If you strip out four of the big contributors to inflation: Education, Food, Fuels and Lubricants, Electricity, Gas and other Fuels     you will see that the Core underlying inflation is actually below target at about 1.4%. See table below

Unfortunately it has been a consumption lead recovery in the UK rather than production as we are sucking in exports from Europe quicker than we are able to expand our export trade to places like China. Hence we are running a trade deficit and not expecting a robust recovery like in the USA, because our increase in export trade has not been dynamic enough.

This can be seen in where the recovery is happening in house prices. London which is lead by the service industry and consumption has had house prices rising by 10% where the National average is 4.3%. The North where manufacturing industry has traditionally been based is seeing little or no increase in house prices dependent on the area.

The figures that got the press in a spin was the decrease in unemployment rates, because the Bank of England had indicated that it would only look at raising the interest rate if unemployment dropped below 7%. However even if it was below 7% now the recovery is not robust enough to even consider raising rates and it is expected that there will only be a 60% chance of unemployment dropping below 7% by the end of 2015. see chart to the right and below:

The productivity gap where we were seeing an increase in private employment, but a much lower level of increase in output has now started to close which is good news, but to really see a long term sustainable robust recovery it is business investment that needs to increase so we can compete with emerging low cost markets.

The current figures do not show that corporate investment is increasing, but it does appear that this is changing and may be reflected in future data. Companies may be using their current reserves before seeking borrowing to invest in productivity

The GDP figures shown in the chart below are predicted to improve with growth at about 2 -2.5% per year, but this is within target for GDP without putting pressure on inflation levels or interest rates.

Predicted future inflation rates inflation rates by  the Bank of England are pretty much spot on the targeted 2% level as seen below

Overall the UK economy is in a much healthier position than it was a year ago, but stagnation in our main trading partners in Europe and lack of corporate investment and exports means we have little to worry about at the moment concerning an imminent boom and a need to increase interest rates before the end of 2015 or beyond on current projected figures.

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