UK CPI shows any spark can bring back high inflation

20th May 2014

UK CPI Data – 20th May 2014

The UK does not share the same disinflation problem as the rest of Europe, and after pumping £375 billion into the financial system, the Bank of England is treading on dangerous ground with any trigger likely to bring back high inflation.

UK headline CPI rose to 1.8% in April, a mere 0.2 percentage points away from the Bank’s official inflation target. The real focus was the jump in core inflation to 2%, reversing all the declines seen since September 2013.

The divergence between core and headline price growth shows that the UK has benefitted from lower global food and energy prices and a stronger sterling in reining in inflation. These prices are set on global financial markets and can reverse declines just as quickly as they fell.

While increasing airfare costs also pulled inflation higher in the month, house price growth began to creep into overall price levels, with primary house costs up 2.6%. Mark Carney may have officially handed over responsibility of the bubbling housing market to the FPC, but with house price rises affecting his inflation targets this issue is squarely in Mr. Carney’s court.

By his own words, Carney has only one blunt tool to hit the MPC’s inflation target, interest rates. If April’s higher CPI reading is the UK’s inflation bottoming out, Carney will be cornered by his own policy assertions into hiking rates.

The Bank of England’s aggressive monetary easing during the 2008 financial crisis flooded the system with inflationary fuel and now any spark will trigger the underlying price pressures, bringing back above target inflation with a vengeance.