Some good news on inflation: it eased back to 3.4% in May, lower than the City expected, despite soaring petrol prices. That’s still well above the Bank of England’s 2% target, of course; but after hitting a 17-month high of 3.7% in April, at least it finally seems to be going in the right direction. Sighs of relief all round on Threadneedle Street, then – and it probably reduces the chances of an interest rate hike any time soon, which will please mortgage holders. But with news also emerging today that house prices are rising at their fastest rate since October 2007, it’s no time to be complacent...
Inflation has been above target for the last seven months now, prompting a string of explanatory letters from Bank Governor Mervyn King to the Chancellor. The biggest upward pressure on the Consumer Prices Index in May was petrol, which hit a record high of 120.5p last month. However, motorists faced even steeper hikes this time last year, as did smokers and drinkers – and with food prices down slightly (as evidenced by Tesco’s results today), the overall effect was to drag the index down by 0.3%.
This will please King, who has consistently argued that inflation will fall back towards the 2% target over the coming months thanks to all the spare capacity in the economy – without the need to raise interest rates, which have been held at the record low of 0.5% for the last 15 months. Higher-than-expected inflation rather undermines this argument, and would have placed the Bank under increasing pressure to hike rates – but as long as the figure’s heading downwards, we probably shouldn’t expect a hike any time soon (perhaps not until next year). Great news if you’re on a tracker.
Speaking of which, the latest news on house prices does provide some cause for disquiet. UK annual house-price inflation is now back in double-digits, according to the Government: April prices were 10.1% higher than a year ago, although last month’s increase of 0.4% was lower than the 0.7% jump in March. With conditions in the housing market still looking distinctly dodgy – mortgages are hard to come by, there’s a big fiscal squeeze coming and historically, houses still look over-priced – that’s odd, to say the least.
In today's bulletin:
BSkyB shares rocket after News Corp takeover bid
Tesco looks abroad as UK sales growth grinds to a halt
Inflation finally falls - but house prices shooting up again
Letters from Malawi: Bribery without corruption
Do ex-CEOs make better chairmen than outsiders?