Tuesday, October 12, 2004

It appears the nervous inflation-Nellies in the UK have been overreacting -- disinflation is the name of the game in Britain as well.
A fall in the cost of transport services helped to push down the rate of UK inflation in September for the third successive month.

Figures released on Monday showed the Consumer Prices Index - the government�s target measure - fell by 0.2 per cent to 1.1 per cent, its lowest level since March. . . .

The drop surprised analysts who had expected the rate of inflation to remain unchanged following two consecutive falls in July and August.

It is now well below the government�s target of 2 per cent and Howard Archer, chief UK economist at Global Insight, said it would give the Bank of England additional scope to sit back for the rest of this year and further study the impact of its five interest rate hikes since November 2003 on the housing market and consumer spending.

Nevertheless, Mr Howard predicted that interest rates will rise a little further.
One interesting aspect of the British inflation picture is that the government's two basic inflation indices -- the Retail Price Index (RPI) and the Consumer Price Index (CPI) -- have been diverging notably since June.

The big difference between the two indices is that RPI includes mortgage interest payments while CPI does not. British CPI is now at 1.1%; the RPI minus mortgage interest payments is at 2.1% and that includes food and energy! Thus excluding rampant housing inflation, the UK is quite frankly flirting with general deflation.

Sound familiar?


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