Ralph Shell @ 12:56 PM, Tuesday August 17 2010
If the consumer price index were a contest, the Brits would take first prize. The y/y core CPI in Britain was reported to be +2.6%, lower than the expected 3.0%, and the 3.1% in the previous period. An improvement yes, but still above the 2% Bank of England target. The real CPI was a little higher with numbers of 3.1%, expected 3.1% and 3.2% in the previous period. In Europe the y/y CPI reported earlier, was +1.0 versus an expected 1.0% and 0.9% in the previous period. In the US as reported last week, the m/m core CPI number was up +0.1% as expected and +0.2 in the previous period.
The previous Labour government had a dreaded fear that deflation might return, with a negative influence on the housing market, The rates were kept low, and the money supply ample, with the injection of a couple hundred billion pounds via quantitative easing. Deflation was successfully avoided, but the price to pay may be inflation rates higher than deemed healthy.
The Bank of England Governor Mervyn King warned in a letter to George Osbourne, the rate of inflation was higher than expected and the British consumer will need to prepare for higher prices of food, travel, and other items.
Minutes from the Bank of England's monthly meeting will be released tomorrow. The Telegraph.co.uk reports:
"Inflation's persistently high level has already prompted Andrew
Sentance, one
of the nine people who decide the cost of borrowing at the Bank, to
start
voting for higher interest rates. The minutes of the Bank's latest
meeting
are due tomorrow and traders will be keen to see if anyone has joined
Mr
Sentance.
However, today's figures do provide some ammunition for Mr King's claim
that
the loftier level of inflation will pass. Core inflation, which
excludes
more volatile elements such as energy, fell from 3.1pc to 2.6pc, its
lowest
level since the end of last year.
He wrote in his letter today that policy-makers “stand ready to expand
or to
reduce the extent of monetary stimulus” as needed, prompting Mr
Osborne to
reply that he welcomes the bank’s “flexibility.”
It will indeed by interesting to see if any other members of the policy committee, fearing inflation, cast their vote for a higher rate. It has been our opinion that the pound has gotten over extended on the recent rally. Should the MPC meeting show others in favor of a rate increase, this might give us a rally. We wish to use the rally to scale into a short position, hopefully beginning in the 1.5770 level.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.