Inflation Surges to 3.8% as Bank of England Loses Control of Monetary Policy

By: Nadeem_Walayat

The official rate of UK inflation as measured by the CPI index surged higher for June to 3.8% from 3.3% which is inline with Market Oracle expectations that is expected to see inflation continue trending higher to well above 4% over the summer months, with the RPI inflation measure set to rise to above 5%. The impact of the inflationary surge is for the Bank of England to have effectively lost control of monetary policy in that the Bank is paralysed into inaction, neither able to cut interest rates to prevent the UK economy from plunging into a recession, nor able to raise interest rates to curb surging inflation for fear of triggering a deeper recession.

Therefore Britain is heading for a period of stagflation that is accompanied with not only real terms asset price deflation but also in nominal terms as the UK housing market enters into full house price crash mode, as measured by a 5.8% fall in house prices for the quarter April 08 to June 08 as illustrated by the below graph and at an annualised rate of 9% which is beyond the forecast trend for a decline at the rate of 7.5% per annum as of August 2007.

UK inflation's bust through to near 20 year highs has deep consequences for the potential to ignite a wage price spiral, whereby workers demand higher pay settlements that employers pass onto consumers that again in turn demand ever higher wage settlements thereby igniting a wage price spiral that eventually requires much higher interest rates accompanied by severe economic contraction.

With Interest rates on hold at 5%, the UK is heading for negative real interest rates as the RPI passes 5%, the consequences of which will be felt in the foreign exchange markets as the British Pound falls against the stronger currencies and therefore further contributing to inflationary and stagflationary forces as import prices continue to rise.

The Bank of England is placed in an extremely difficult situation which puts it at odds with the Brown Government that is seeking to boost the UK economy through fiscal stimulus as observed by the £3 billion tax cut during the May 2008 series of elections. The impact of which is to prolong the period of stagflation during 2009 by undermining the Banks efforts to try and bring inflation back under control.

Recent articles on UK Inflation, Interest Rates and House Prices

• UK House Price Crash In Progress!
• UK Interest Rates On Hold as Bank of England is Paralysed by Fear of Inflation
• UK Housing Bear Market Threatening Economic Deflation
• UK House Prices GDP Adjusted Real Trend Forecast
• Wage Price Inflation Spiral Plus House Price Deflation Equals Stagflation

By Nadeem Walayat
http://www.marketoracle.co.uk

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Nadeem Walayat has over 20 years experience of trading, analysing and forecasting the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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