Best Financial Markets Analysis Article Inflation data for July CPI inflation came in at a truly shocking rate of 4.4%, up 0.6% on June and well beyond our expectations for CPI inflation of 4.1% with the upper worse case scenario of inflation of 4.3%. Whilst at the same time the more recognised RPI measure equally rose to a shocking 5% rate also up 0.6% on June and now matches the base interest rate of 5% as the UK heads for negative real interest rates which has very bearish implications for sterling.

Surging inflation is being fed by soaring fuel and food prices all of which are running at rates in excess of 10%, which in foods case at 13.7%. The recent inflation busting rises in gas and electric prices of approaching 30% is not going to help inflation data in the following months despite a sharp drop in the price of crude oil as yesterdays producer price inflation data confirmed. To add to stagflation worries, yesterday the Water companies announced rises for an average of 3% above the CPI inflation, which is more in recognition that it is a flawed measure of UK inflation rather than seeking to generate extra revenue for investments.

I have considered for a long-time that the true rate of UK inflation is more accurately measured as RPI+1%, (6%) as the official CPI inflation measure tends to exclude highly inflationary components such as taxes and housing costs, additionally the inflation rate is brought down by price cuts of luxury goods that are not being purchased during an economic slowdown / recession by distressed retailers in an attempt to get rid of stock. Whilst strapped for cash consumers are forced to concentrate on the necessities such as food, fuel and housing costs. Therefore the official inflation measure despite jumping to 4.4% is under reporting the true rate of UK inflation as experienced by consumers by up to 2%.

Additionally the failure to report the real rate of inflation results in year on year erosion of consumer purchasing power as the government attempts to link pay to the official CPI inflation rate, which over the last 5 years has resulted in erosion of purchasing power of 13% against just the RPI measure. This has meant consumers have filled the shortfall over recent years by means of consumer debt and equity withdrawals, however the housing bear market has ensured that consumers can no longer use their houses as ATM cards, therefore the reason why the UK is experiencing such a sharp economic slowdown and Labour experiencing a vote meltdown.

The implications for UK interest rates will be discussed in an in depth forecast for UK interest rates for 2009 that will be published later this week, existing and past forecasts are listed below.

2008 - UK interest rates to fall to 5% by September 2008 - Aug 07, Sept 07 (revised to 4.75% - Jan 08)

2007 - UK Interest rates to peak at 5.75% by September 2007 - Dec 07

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

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

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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Comments

Talk About Debt
12 Aug 08, 11:48

4.4% Inflation

A good post. I agree that both the RPI and CPI are misleading. I believe a rate between 8% and 10% is closer to reality.

Dayahka
12 Aug 08, 21:39

CPI - In US it's 3X yours

In the US the government has been giving out CPI statistics that are criminally fraudulent, saying 3 or 4 or 5 percent when it's quite obvious that it's more like 15 percent, or more.

Peter Davis
29 Aug 08, 07:34

5 yearly inflation rates

A couple of paragraphs that sum everything up wonderfully.

I teach at in independent school where we have an annual rise every September. This has generally been 2.5%. I would like to compare this with annual figures at September over the last 5 years for CPI and RPI, is there an easy way to get hold of these figures, please?

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