Inflation Rate Causes Price Fears

The official figures released yesterday, on August 18th demonstrate that the level of consumer confidence did not fall as much as it was predicted in July, which in its turn led to concerns over the measures taken to beat the recession as they are now believed to cause price pressures. The consumer prices index, or CPI, which shows the official rate of inflation, stood at 1.8% in July, although analysts forecasted its fall to 1.5%. At the same time, RPI, or retail prices index including mortgage costs, rose from -1.6% in June to -1.4% in July despite the fact that Reuters poll showed the majority of British economists predicted its fall to -1.7%. British policymakers still expect the rate of inflation to decrease to 1% in the year of 2009 despite the fact that CPI still remains at a higher level than previously expected by the Bank of England. Even though the high level of CPI in July did not influence the monetary policy of the Bank of England, another 2-3 months of such high reading might result in significant changes undertaken by the MPC (monetary policy committee), say British economists. At the moment, the base rate remains at the level of 0.5%, which means that UK lenders still keep the same interest rates on the majority of mortgage products. Meanwhile, the Central Bank says it expects inflation to stay low for at least 2 years, which fact was highlighted in last week’s quarterly report published by the BOE. However, UK economists think that the Monetary Policy Committee should be more preoccupied with medium-term rather than short-term factors, such as inflation dynamics. Some analysts even say that the inflation rate in Britain will bottom out at the end of the year of 2009 with further increases in the beginning of 2010, which is highly likely to result in the base rate rises. Another factor that influences the level of inflation and, as a consequence, UK prices and property values, is the price of oil, which now stands at $71 per barrel, compared to $30 per barrel in the end of 2008. Let us remind that the latest August data suggests that property prices in Great Britain saw a 2.2% increase and are expected to grow further along with the CPI rate.