Deflating Inflation
22 / Feb / 2009
The Consumer Price Index fell much less than expected in January, according to last Tuesdays release, but the surprisingly strong figures is not expected to stand in the way of further monetary policy easing from the Bank of England. Higher prices for alcoholic drinks and retailers making smaller than usual price cuts in the New Year sales after big reductions in the run-up to Christmas meant CPI inflation fell only a tenth of a point to 3.0 percent. Analysts had predicted 2.7 percent. That was also still some way above the Bank of England’s 2 percent target but the central bank is still forecasting inflation in the to slow dramatically in the months ahead and is widely expected to cut interest rates again. The previous tool for measuring inflation, RPI, on which most wage deals are based, is already heading into negative territory. It fell to just 0.1 percent, the lowest level seen since 1960. Unlike the CPI measure, the big drop in mortgage costs pushed it down. British gross mortgage lending fell 52 percent on the year in January to its lowest monthly total since April 2001, according to the Council of Mortgage Lenders Gross mortgage lending reached an estimated 12.4 billion pounds in January, down 8 percent from December's level of 13.5 billion and compares with 25.9 billion in January last year. Mortgage lending activity continues to be very weak and while people are searching eagerly for some signs of recovery, it is unrealistic to expect a meaningful revival in lending in coming months. This week is rather thin on the ground again with only a few economic releases. On Tuesday we have the CBI Distributive Trade Survey and then on Thursday it is the turn of the Depressing Nationwide House Price Survey. The latter is expected to show a decline in prices of 1.3% month on month and 17% on an annual basis. Given the current climate all focus will be on the Bank of England a week on Thursday. Economists’ wildly expect another cut of 0.5% in order to encourage banks to start lending and the consumer to start borrowing again. Rumour has it that Northern Rock is expected to start offering mortgages again (albeit with help from the Government) which will hopefully kick start mortgage lending and encourage them and us to take the plunge!