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Home > Regulation > UK Regulation

By Cara Waters | Published Jun 14, 2011

Market view: Inflation 'almost irrelevant' to rate rise

Consumer Price Index (CPI) inflation remained stubbornly high at 4.5 per cent in May, still more than double the Bank of England's (BoE's) inflation target, prompting industry experts to warn of their concern over the ongoing game of "Russian roulette" with the economy.

Max Johnson, forex broker at Currency Solutions, said the inflation figures were "irrelevant" to any interest rate rises.

He said: "The BoE's game of Russian roulette with the economy continues. If it raises rates to control inflation, it will be putting another bullet in the chamber.

"From an interest rate perspective, the monthly inflation data is almost irrelevant given the embattled state of the economy.

"Unless inflation starts to rise again materially, by around another basis point, we can disregard any notion of a rise in bank rate during 2011.

"Martin Weale may argue that a rate rise now, however nominal, will give us a head start on inflation and obviate sharper potential rises in the future, but we don't have the luxury of preparing for the future.

"In these highly precarious times, there's only the present - and the present isn't looking great for UK plc."

David Miller, partner at Cheviot Asset Management, agreed the CPI figures were unlikely to have any impact on whether the Monetary Policy Committee (MPC) would raise rates.

He said: "A more telling issue is that house prices are falling and wage growth is not apparent and these are much more important factors in any interest rate rise."

Mr Miller said the CPI figures highlighted the extent of food inflation, which was of concern as it was likely to feed into lower discretionary spending.

He said: "The key thing is that the increase and effect of high food prices at a time when discretionary expenditure is being squeezed becomes more important on a weekly basis. What people regarded as discretionary spending is being reduced.

"Overall, the MPC will look to see whether living cost inflation feeds into wage growth. All the indications so far have shown little if any pass through to wages, contributing to the relatively lacklustre retail sales volumes evident in recent months.

Stephen Jones, manager of the Aegon Inflation Linked Fund, warned higher inflation figures were still to come.

He said: "An inflation print in line with expectations does not inspire great headlines. What does continue to concern us however is the elevated level of those expectations and the persistently high inflation numbers we have seen now over an extended period of time.

"The CPI has now been above three per cent - the upper end of the BoE’s target range - for 17 months.

"With recent news of further, above expectation, energy price rises yet to filter into the inflation numbers we continue to believe that the peak in inflation is yet to come."

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