Tuesday, November 13, 2007

Inflation Forecasts in the UK 2008

Ahead of tomorrow's inflation report, the £ was weak in the expectation that interest rates may start to fall in 2008. However, despite predictions of lower interest rates, there are still concerns over inflationary Pressures which have been building in the UK

  • Rising Oil prices have increased transport and packaging costs. Since Sept oil prices have risen 20% in dollar terms and 15% in Sterling terms.
  • Increased food prices. This is partly due to poor harvests in Europe and rest of world. Global warming has been attributed as a major factor in the lower supply of food. (food prices have risen by 6%)
  • Factory input prices rose by 3.8% to last year
  • Airlines such as British Airways have announced they will be raising ticket prices to account for the rising costs of oil.
  • Examples: Premier Foods - makers of Hovis bread have said prices will rise by above CPI inflation. Robert Wiseman, Britain's biggest dairy producers, have said price of milk and cheese will rise

  • However, excluding food, drink, alcohol and petrol, input price inflation is just 2.3%
  • CPI inflation is 1.8% (Oct 2007)
  • Raw material prices is often erratic and doesn't necessarily lead to higher inflation.
  • Weakness in the UK Housing Market could reduce consumer spending.
  • These cost push inflationary factors are relatively small compared to the impact of aggregate demand on the economy


CPI inflation in the UK is forecast to rise from 1.8% to 2.1% next month.
However, next year, it is felt that inflationary pressures will moderate as oil prices run out of steam and domestic spending remains subdued by credit crunch and falling house prices.

Conclusion

Despite rising food and oil prices I feel that inflationary prospects are subdued. I feel the deflationary effects of falling house prices will be more significant than temporary cost push factors

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