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Inflation data in the spotlight

Tue, May 13 2008, 10:03 GMT
by Adam Narczewski

X-Trade Brokers, XTB

Higher than expected CPI inflation reading in the UK makes it less probable that the Bank of England will cut interest rates one more time this year.

In April, CPI inflation rose in the UK by 0.8% on a monthly and by 3.0% on a yearly basis, which is the highest level since March of 2007. The reading are much above forecasts of 0.5% and 2.6%. The published data confirms increasing inflation in the United Kingdom. Yesterday’s PPI report showed growing inflation by 1.4% on a monthly and 7.5% on a yearly basis. Producer’s prices in April increased the most since 1986.

The PPI and CPI publication confirm that the UK has a problem with inflation, which is now 1.0% over the limit established by the Bank of England (BOE). Such situation lowers the chances for another interest rate cut in the UK. Most analysts expected such move in June, forecasting that the BOE will lower interest rates by 25 basis to 4.75%. Now, that probability is low despite the slowing UK economy.

Inflation is still a danger to the global economy, as noted by the International Monetary Fund (IMF) last week. In a tough situation is the European Central Bank (ECB). The Euro zone’s economy is clearly slowing down due to its economic relationship to the American economy, but also due to a strong Euro. The common currency is strong as never, reaching 1.60 at the end of April. Recently, the American dollar rebounded mainly due to better news from the U.S economy and rebounding stock markets. Still, the European economy slowed down to a dangerous level, which probably an interest rate cut could change. At the same time, the Euro zone is experiencing inflationary pressures with the CPI increasing to over 3.0% (way above the 2.0% set by the ECB). What will the ECB do in the next couple of months? The monetary policy of the ECB can be directed by the inflation reports that are being published this week. We already know what the UK brought us, now we are waiting for tomorrow’s CPI publications from the U.S and and Thursday’s Euro zone’s CPI.

Published on  Tue, May 13 2008, 10:04 GMT