Consumer confidence over inflation could cause interest rates to rise

13 June 2008 / by Rebecca Sargent
The Bank of England's Monetary Policy Committee (MPC) is facing one of its toughest challenges to date, as consumer confidence levels in its ability to reduce inflation fall to record lows.

The Bank's quarterly survey of inflation, released yesterday, has revealed that net satisfaction in the Bank's attempts to reduce inflation stands at just 22 per cent, the lowest since its records began in 1999.

According to the results, consumers believe inflation has now hit five per cent, a whopping three per cent above the Bank's target rate of two per cent. The official measure of inflation, the Consumer Price Index (CPI) currently stands at three per cent but is due to be updated on Tuesday.

The Bank of England's governor, Mervyn King, had a narrow escape last month as inflation sat at three per cent; if it hits 3.1 per cent or higher, the Chancellor Alistair Darling will be expecting a letter from the Bank detailing reasons for the increase.

New Star's Simon Ward comments on the likelihood of inflation above 3.1 per cent:

"Producer output prices accelerated further in May, but the aggregate PPI (Producer Price Index) is not generally a good short-term guide to CPI movements. However, the PPI food component correlates closely with consumer prices of processed food and showed a further large rise last month. If reflected in the CPI, this would add an estimated 0.12 percentage points to the annual increase – sufficient to reach 3.1 percent assuming no other changes."

The MPC meet each month to debate over the Bank interest base rate, its effects on inflation, and to decide whether the interest rate should rise or fall to hit the Bank's inflation target.

The Bank rate currently stands at five per cent, the same as last month, as the MPC voted in favour of no change. However, prior to this, interest rates have been falling gradually since July last year – the last time the base rate saw an increase.

Experts are now predicting that the base rate will rise in the coming months due to current inflation concerns. And, analysts warn that by raising the interest rates the Bank may be risking recession.

Food and fuel bills have risen at a rapid pace over the last few months and are already squeezing consumer's budgets to breaking point. Consequently, experts and consumers are calling for action before the UK economy deteriorates further.

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