UK Inflation Becomes a Problem

By Luke in Currency Articles | December 14, 2010 18:48 | Tags: , , , , ,

UK Inflation data released this morning has shown that the headline inflation rate has accelerated to 3.3% in the month of November. Policy makers will undoubtedly take note as price pressure concerns mount in the markets.

Historically when the UK has emerged from recessions of the past, we have had problems with inflationary pressures and subsequent sky rocketing of interest rates to keep the economic cogs in balance. There is now evidence that inflationary pressures will continue to mount into 2011 with expectations that things may ease towards the end of 2011. At the very least the Band of England has admitted that inflation will remain above the 2% target for the whole of next year.

Consumer prices have risen 3.3% from last year. This is the highest since May and exceeded the forecast of 33 economists in a Bloomberg survey prior to the release. These figures will influence the Bank of England’s decision as to whether to continue with the Quantitative Easing program moving into 2011.

Retail price inflation, one of the key measures of the cost of living also accelerated to 4.7% in November, the highest in three months.

It is unlikely that the Bank of England will respond to the accelerated inflation figures with any change in the interest rate in the short term. The economy needs low interest rates to continue with its recovery and any rise in rates could cause a stall and a return to recession. The economic system is on a knife edge and needs to be kept in balance. Of course if inflation continues to accelerate the Bank of England will be forced to respond. The consequence of this will be significant pain in the markets.

US Retail Sales increased more than forecast today and will help to act as another indicator that optimism and positive sentiment in the US markets is subsequently spurring on the economic recovery ahead of the festive period. The 0.8% gain in purchases followed a 1.7 percent jump in October. Stocks rose on the risk appetite caused by this release and the USD has strengthened coming off highs at 1.5908. Dollar volatility has been greater than usual as traders are still uncertain on fundamental direction. UK Retail Sales figures will act as a key influence for direction this later in the week.

Best Regards
Luke Zorab
Torfx Currency Dealer

“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”

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