Consumer Price Index finally hits Bank of England 2% inflation target

by Neil Patterson

15:05 PM, 14th January 2014
About 6 years ago

Consumer Price Index finally hits Bank of England 2% inflation target

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Consumer Price Index finally hits Bank of England 2% inflation target

The Consumer Price index (CPI) inflation rate fell to 2% in December down from 2.1% in November finally hitting the Bank of England’s target medium term figure for inflation.

CPI is the measure used by Government for targeting inflation and this is the first time since November 2009 the inflation has been at or below this target. CPIH annual inflation, which is the measure of consumer price inflation including owner occupiers’ housing costs, was actually lower at 1.9% in December.

According to the Office for National Statistics (ONS) the largest contributions to the fall in inflation came from prices for food, non-alcoholic beverages and recreational goods and services. However, these were partially offset by an upward contribution from motor fuels.

This vindicates the Bank of England’s dogged insistence for the past 4 years that inflation was being caused by external rises in the cost of imports that we have no control over rather than any domestic demand lead inflation. Had we seen the Bank of England react to this inflation by increasing interest rates before the recovery, as called for by many sections of the press, we could have seen an even deeper recession than we have already.

The good news for Landlords with mortgages or commercial loans is that for the time being there is no pressure from inflation (the main economic target) to increase interest rates.

The main stream popular press are reporting that the next thing to worry about is unemployment dropping below 7% from its current 7.4% level. The 7% figure was only used as an economic reference by Mark Carney the governor of The Bank of England to show that we should not consider raising interest rates until the economy has hit this measure. It is NOT a figure that would trigger interest rate rises on its own.

The Prime Minister David Cameron said, “It’s welcome news that inflation is down and on target. As the economy grows and jobs are created this means more security for hard-working people.”

CPI



Comments

Mark Alexander

15:24 PM, 14th January 2014
About 6 years ago

Why would the mainstream press be worrying about unemployment falling?
.

Neil Patterson

15:46 PM, 14th January 2014
About 6 years ago

Reply to the comment left by "Mark Alexander" at "14/01/2014 - 15:24":

Mark Carney and The Bank of England widened their remit to consider economic recovery as well as purely inflationary targets.

To give stability and confidence to the economy they said that unemployment would have to hit 7% before they would even consider raising interest rates.

There is a natural level for unemployment and if it falls below this level the supply of labour available falls compared to demand leading to wage inflation and hence domestic demand lead inflation.

Low unemployment levels below the natural level can have a significant effect on inflation.

Mark Alexander

16:22 PM, 14th January 2014
About 6 years ago

Reply to the comment left by "Neil Patterson" at "14/01/2014 - 15:46":

So unemployment below 7% is considered good for the economy generally but if it falls below 7% and inflation remains at 2%or below it could be bad news for those who fear interest rate rises. Is that what you meant?
.

Ian Ringrose

17:26 PM, 14th January 2014
About 6 years ago

No Mark,

Unemployment above 7% is considered to be so bad that the bank of England could not see a likely case where there would be a reason to increase interest rates and risk more unemployment until the level of unemployment reduces.

They said NOTHING about what will happen when unemployment drops below 7%.

Mark Alexander

17:45 PM, 14th January 2014
About 6 years ago

Reply to the comment left by "Ian Ringrose" at "14/01/2014 - 17:26":

Yes I understand that, HOWEVER, by implication does that not mean that if unemployment is lower than 7% and demand led inflation exceeds the 2% target that interest rates must rise?

I appreciate that there are now two main level as opposed to one but nevertheless .....
.

Ian Ringrose

18:06 PM, 14th January 2014
About 6 years ago

Reply to the comment left by "Mark Alexander" at "14/01/2014 - 17:45":

I don’t see interest rates being put up by the Bank Of England until after they have stopped pumping money into the economy in other ways. But they don’t wish to admit in public how much fee money they are giving to bankers.

Personally I will start to expect an increase in base rate when the difference between what a bank will pay on my savings and what the bank will charge me on a new mortgage returns to more normal levels.

Likewise if we start to see real increase in earning or people expecting average earning to increase.

Hopefully if we get demand led inflation due to consumer credit the BOE will use its powers to control the amount of consumer credit by changing banks capital requirements.

But if there is a run on the pound all bets are off….

Neil Patterson

18:32 PM, 14th January 2014
About 6 years ago

Sorry back now,

Yes to Ian. BofE have effectively said above 7% is so bad for the economy they wouldn't even consider increases rates.

But there is no indication that any figure below 7% would have a particular effect as it depends on so many factors.

There is however a tipping point where if you go below the natural level of unemployment, and no one really knows where that is, wage inflation will speed up and you will get demand lead inflation as opposed to supply cost inflation as we have at the moment.

True underlying inflation is still well below 2% so I do not see any short term inflationary pressure causing a problem.

The above is all good news for people worried about their tracker rate mortgages, but we would all be better of if the economy was going so brilliantly that the BofE even had to consider increasing rates.

Colin Childs

18:53 PM, 14th January 2014
About 6 years ago

Are we heading for a deflation? Europe appears to be heading that way despite huge injections of liquidity into the banking system. Japan's example is a stark reminder of what can happen when there's too much credit in the system buoying asset prices.

Yet more QE perhaps. As deflation will hit hard on both the Government and the Consumer in terms of servicing and repaying their debts. Politicians have survived for the past 50 years or so on the back of inflationary policies, i.e. Inflation Tax. To cover their spend today, pay tomorrow policies.

While the GFC may be over. The consequences are far from over.

Neil Patterson

19:05 PM, 14th January 2014
About 6 years ago

Reply to the comment left by "Colin Childs" at "14/01/2014 - 18:53":

Very good question and who knows !

Little known fact is that recently even the Chinese injected money into their banking system! Although they are not really a true free trade capitalist market.

Mick Roberts

7:31 AM, 15th January 2014
About 6 years ago

Mark, where was u when all this talk about unemployment needs to be below 7% for BOE to raise interest rates? Even my dog knows that-And I han't got a dog ha ha.
U must have been in Russia for them two weeks, it was massive news to the likes of me & u. I think u should come round my house for the day & get into the routine, when toast is toasting in morning & when dinner is cooking at dinner, EVERY time, put BBC1 Teletext page 200, takes approx. 2 mins a day.

Cause at that moment when he made the 7% announcement, I don't believe unemployment was falling, but then it started to & people started getting jitters about rates going up.

I was thinking exactly the same, deflation, Japan. Those with trackers may still have some years of goodness left.

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