Does inflation level mean that rate cuts are ruled out?

Inflation levels over recent months have been soaring, and in July inflation hit the highest levels since records began in 1997. coming in at 4.4%. In fact, inflation has been soaring for quite some months, and has been way over the government target of 2%. The latest rise in inflation has resulted in the rate of inflation being more than double that set by the government.

The huge jump in inflation levels has impacted on consumers and industry in a number of ways. It is thought that the soaring cost of food and oil are amongst those things that have pushed the rate of inflation up, and certainly consumers have been faced with soaring prices when it comes to food, energy usage, and petrol. Worse still, the governor of the Bank of England, Mervyn King, has said that inflation levels are likely to get higher, with predictions that the rate could even hit beyond 5% and close to 6%.

The issue with the soaring rate of inflation is having a profound effect on interest rate cuts, and many industry officials are now predicting that the base rate will not come down again this year, with some even suggesting that the base rate could rise again. Since the beginning of this year there have been two base rate cuts already, and the base rate has fallen to 5%. At first many industry officials were predicting quite happily that the base rate would be cut another couple of times over the latter part of the year, and that the base rate could fall as low as 4% by the end of the year.

However, this was before inflation levels spiralled out of control to the degree that they have, and since inflation soared most industry officials have changed their minds and their predictions. In fact, most now think that a base rate cut is off the cards for the remainder of this year, and this is something that has disappointed by industry groups and consumes that were hoping to see the base interest rate come down to some degree.

One leading economist said that energy prices and food prices could no longer be held solely responsible for the rise in inflation levels, stating: ‘Worryingly, core inflation spiked up to 1.9% in July from 1.6% in June, which raises concern that higher energy and food prices are increasingly having second-round inflationary effects. Inflation is set to go significantly higher still over the coming months, despite the recent retreat in oil prices. Indeed, it could well reach 5.0% in October. The spike increases the risk that the Bank of England will raise interest rates.’

He did add that whilst interest rate cuts seemed to be on hold for the remainder of this year because of the inflation levels, the base rate could fall considerably next year.

He said: ‘Nevertheless, it now seems very unlikely that the Bank of England will be prepared to cut interest rates until 2009. We still expect interest rates to come down markedly in 2009 to 4.25% by mid-2009 and to 3.75% by the fourth quarter of next year.’

Tags: energy, concern, Business Finance, energy usage, highest levels, Worryingly