Inflation Expectations

[DONT PANIC !!! DONT PANIC !!!]

Inflation expectation research from Lloyds Economics Research and analysis.

http://mediaserver.fxstreet.com/Reports/c6...9d86b9ebdd1.pdf

"The Bank of England’s own inflation forecast, based on 4.75% interest rate, shows that inflation would fall

back towards, but still be above, the target in 2 year’s time, see chart e. This suggests to us that a rise in

base rates to 5% in November is almost a done deal. Only significant signs of better than expected inflation

or slower economic growth would prevent this rise taking place. But the Bank has revised up its estimate of

UK growth since the last Inflation Report in May, see chart f. A view that official interest rates will have to be

raised further is now priced into the UK money markets. The short sterling futures contract, which looks at

where base rates may be in future, suggests that there will be one, and possibly two, more base rate

increases over the next year or so. There may be a lesson for the Fed from all of this. If its assumption that

inflation falls back does not happen, then it risks a further rise in inflation expectations and then having to

raise interest rates further, perhaps by more than if it had acted sooner."