Firstly inflation has been a little volatile. For example, after CPI reached a peak of 3% earlier in the year, May inflation fell back to 2.5%. It is worth looking at underlying inflation which ignores volatile goods like energy prices and tobacco. Inflation May 2007
Why Inflation has been rising
1. The bank is concerned primarily in the growth of consumer spending. There is concern this is leading to growth above the underlying trend rate. Growth in consumer spending is coming from various factors such as:
- Lower savings ratio and increased debt. See: why debt has increased in the UK
- Rising House Prices. Booming Housing market creates positive wealth effect and more spending
- High levels of consumer confidence
Evaluation - Why Inflation May Fall
- Interest rate rises take time to have effect. For example, many fixed rate mortgages taken out when interest rates were very low (2003 and 2004) are soon coming to an end. Therefore, homeowners will soon be facing much higher mortgage payments and as a consequence reduce their spending.
- Some feel rising house prices are actually causing young consumers to spend less. This is because people fear there is a bubble which will soon burst. Also first time buyers need to save to get on the property ladder
- High levels of debt in the UK, mean that rising interest rates will have a big impact.
- Global inflation is still relatively benign due to process of globalisation e.t.c.
- House prices may set to fall soon - House price fall likely