Boe Inflation Report

[bear_or_bull]

Yesterday:

Inflation down 0.2% from September. Now 2.3% (CPI).

BoE Inflation Report Today

Inflation projected to fall pretty sharply through 2006… GDP forecast to rise.

Couple of interesting quotes from the Mervyn King, Head Honcho

"Broad stability in the housing market to continue". "Activity to pick-up". "[this will drive] a modest increase in consumer spending" .... although, "Almost anything can happen - I'm not going to forecast prices".

Crucially:

No second round inflation effects identified to date by BoE (ie. No wage settlements incorporating higher inflation expectations). This is basically the result of either:

i) inward migration has restricted the ability of workers to negotiate higher wages, or,

Ii) workers are willing to suck-up a "temporary" net loss to their income (resulting from tax and oil / fuel costs) and have in aggregate assumed that this inflation will ease in the medium term, or,

Iii) nobody has noticed that inflation has picked up in the last few months

However, if the working populace was to become more militant & able to negotiate higher wages, then this bet would be off. At the moment the BoE just sees this simply as a risk… But, if wage settlements start to creep up in the spring then the likely interest rate rises to restrict this effect would likely be harsher than previously. But for now, given no second round effects, long-term inflation projections remain on target at the current interest rate. Implicit in this is the assumption of effectively static oil prices, with a likely fall in the short term.

However, if oil prices rise....

So,

Rising interest rates have become less likely.

Static most likely.

Fall in rates during the spring possible (as inflation is predicted to drop) if the economy is still sluggish.

However, this has been noted by the FX markets and added to the falling trend:

$1.72 = £1 in morning trading. Down 0.5%. Adding to yesterdays steep fall....

Joy to the Bulls I guess.

Current leaning. 60% bullish. 40% bearish. Not out of choice.

[apom]

Odd, the first time I have seen old Merv suggest that house prices would not fall..

Is the time when they are falling..

Still.

He suggested that wage push inflation would bring on higher IR's then expected..

I don't know.. its all very complicated..

but the dollar should lead the way..

perhaps...

Who knows...?

exciting isn't it?

[Biriani]

For all those out there who think they know where interest rates are going, the markets disagree.

This chart shows implied market expectations of future interest rates - as you see, it could still go either way.

[El_Pirata]

No second round inflation effects identified to date by BoE (ie. No wage settlements incorporating higher inflation expectations). This is basically the result of either:

i) inward migration has restricted the ability of workers to negotiate higher wages, or,

Ii) workers are willing to suck-up a "temporary" net loss to their income (resulting from tax and oil / fuel costs) and have in aggregate assumed that this inflation will ease in the medium term, or,

Iii) nobody has noticed that inflation has picked up in the last few months

However, if the working populace was to become more militant & able to negotiate higher wages, then this bet would be off. At the moment the BoE just sees this simply as a risk… But, if wage settlements start to creep up in the spring then the likely interest rate rises to restrict this effect would likely be harsher than previously. But for now, given no second round effects, long-term inflation projections remain on target at the current interest rate. Implicit in this is the assumption of effectively static oil prices, with a likely fall in the short term.

However, if oil prices rise....

So,

Rising interest rates have become less likely.

Static most likely.

Fall in rates during the spring possible (as inflation is predicted to drop) if the economy is still sluggish.

However, this has been noted by the FX markets and added to the falling trend:

$1.72 = £1 in morning trading. Down 0.5%. Adding to yesterdays steep fall....

A couple of points:

Yes oil prices are pretty stable right now. Stocks are high. Weather isn't too cold yet so no heating oil demand. But I was speaking to some very experienced American traders the other day who told me there is a kind of unspoken belief in the market that the sh*t will hit the fan with gasoline supplies early next year. There's no way the market can escape the massive loss of refinery output that happened forever.

If the BoE doesn't keep step with the US interest rate rises, then the pund will plummet all of the above points about why inflation will not rise will be meaningless. We will import inflation whether we like it or not!

[AteMoose]

The BOE are very good at saying things to change sentiment, is what they are saying actually an attempt to improve consumer beliefs and dampen possible falls?

[apom]

A couple of points:

Yes oil prices are pretty stable right now. Stocks are high. Weather isn't too cold yet so no heating oil demand. But I was speaking to some very experienced American traders the other day who told me there is a kind of unspoken belief in the market that the sh*t will hit the fan with gasoline supplies early next year. There's no way the market can escape the massive loss of refinery output that happened forever.

If the BoE doesn't keep step with the US interest rate rises, then the pund will plummet all of the above points about why inflation will not rise will be meaningless. We will import inflation whether we like it or not!

and as oil gets more expensive on a global scale.

The pound is dropping against the dollar, oil is traded in dollars.. So the ground we loose against the dollar as their interest rates rise means that oil becomes more expensive.

This is what I believe you mean about importing inflation.

Now, the global currency markets I believe will lead Future Interest rate decisions.

but I have been wrong before.

Can anyone argue that America's IR's catching up to ours would not be damaging?

and they have confirmed that they will expect theirs to reach at least 5% by early next year.

Houses cost more at low IR's and less at high, this last year has confirmed what is an obvious truth (to me)

I would rather have a smaller loan at high IR's then a bigger loan at low IR's.

so please debunk my theory here.. it seems to be substantiated... but like I say...

Bulls, I am always eager to hear your side and perspective...

This is still a discussion forum..

http://news.bbc.co.uk/1/hi/business/4397032.stm

Edited November 16, 2005 by apom

[dogbox]

Couple of interesting quotes from the Mervyn King

"Broad stability in the housing market to continue". "Activity to pick-up".

Im hearing anecdotal readings of the London market that point to a marked pick - up in sales. B2L aquaintances are buying in and around London. Some plan to 'flip' in 6 months and sell to the frenzied Spring crowds. They beleive London is emmerging from 36 months of quagmire.

[IPOD]

Inflation projected to fall pretty sharply through 2006

This is a bit suspect considering the sharp falls we have already seen and will likely continue to see in the value of sterling. Also, $ crude oil prices may be off their highs but with the pound weakening UK purchasers of petroleum products will not see the cost of refined products at the pump decrease by much if at all.

Some plan to 'flip' in 6 months and sell to the frenzied Spring crowds.

LOL, remember what happened when you predicted a "massive" Spring Bounce for this year Dogbox? Remember how you promised to eat a certain part of your anatomy if it didn't happen? Methinks you could be in for another session of gastronomic mastication!

Edited November 16, 2005 by IPOD

[Marina]

Im hearing anecdotal readings of the London market that point to a marked pick - up in sales. B2L aquaintances are buying in and around London. Some plan to 'flip' in 6 months and sell to the frenzied Spring crowds. They beleive London is emmerging from 36 months of quagmire.

Imagine if he had said:

"Instability in the housing market to continue". "Activity likely to decrease".

It would be like hitting the PANIC button. He said what he had to say.

What is really interesting is the £ at a two year low and us holding IRs against rising dollar rates. The economy is so sensitive now that even a reversal of the recent 0.25% fall will create a rumpus. If we stay as we are and US rates reach 5% early in the New Year - there'll be a run on the pound and sharp interest rate rises to combat it (maybe back to the good old 1% at a time). BOE are playing a dangerous game. 'Stability' may be heading through the window.

The 'frenzied Spring crowds' ... thanks for that, needed a chuckle. Rumours are that estate agents are now cancelling their phone lines - properties will only be sold (on a first-come, first served, basis) to people forming an orderly queue outside the door.

In 6 months it will be the middle of May - just as the Spring bounce is fading. You need to be in position on Feb 1st to catch the Spring tide. All would be flippers should buy NOW, get the mag out pronto otherwise they'll miss this opportunity. In fact they may be too late.

[Randall Herbert]

Im hearing anecdotal readings of the London market that point to a marked pick - up in sales. B2L aquaintances are buying in and around London. Some plan to 'flip' in 6 months and sell to the frenzied Spring crowds. They beleive London is emmerging from 36 months of quagmire.

Ah Dog box! or should I address you as Von Braun? Do you actually have any reasoned arguments why the London market will 'suddenly' reverse direction from continuous falls in prices to a condition of sudden 'Frenzied' activity?

Oh you don't.....theres a surprise indeed. Don't you just have to talk to a few more cab drivers?

Falling markets fall for a reason. There is no debt left to acrue and no cash left to spend. And to think you said there would be a spring bounce this year and prices wouldn't fall?

[OzzMosiz]

Forgive me for asking a stupid question, but if the high street picks up, won't this help fuel inflation - more spending on fuel, good etc. Currently we have inflation higher with low consumer spending - not a good thing as far as I can see.

[El_Pirata]

I think that we can all agree - even the bulls - that massive person debt means that the economy is on a knife edge. With IRs at 4.5% it is coping - just. But nonetheless bankrputcies and repossessions are rising. Even a small move up to 5% would be disastrous.

[sign_of_the_times]

Couple of interesting quotes from the Mervyn King, Head Honcho

"Broad stability in the housing market to continue". "Activity to pick-up".

read that as........"many more houses will get dumped on the market"

[Casual Observer]

Forgive me for asking a stupid question, but if the high street picks up, won't this help fuel inflation - more spending on fuel, good etc. Currently we have inflation higher with low consumer spending - not a good thing as far as I can see.

Yes, higher economic activity usually leads to higher inflationary pressures. The converse is true, which is why lower IRs are expected when economic activity is weak.