Tuesday, 19 April 2005

UK inflation rose in March

The annual rate of inflation rose in March to 1.9%. The Office of National Statistics stated that higher air fares and fuel costs contributed to the rise.

The Bank left rates on hold at 4.75% in April for the eighth consecutive month.

"This is a nasty surprise...that significantly increases the chances of an interest rate hike in May," said Howard Archer, economist at Global Insight.

"There are still significant underlying inflationary pressures stemming from high oil prices, the lack of an output gap and the tight labour market."

I'm no economist, but if interest rates rise to forestall higher inflation, then I doubt the Treasury's (and Gordon Brown's) GDP growth target of 3% for 2005 will be met. The lack of an output gap is intriguing, since that means there is little spare capacity in the economy. I'd assume that countries such as France, Germany and Italy possess larger output gaps.

The UK economy has performed well for over ten years. In the period, inflation has been low, unemployment has fallen and only Canada and the United States (of the G8 nations) have experienced higher GDP growth.

Personally (in my layman's opinion) I think this is just a blip. Inflation is still under the two percent target. The fundamental macroeconomics of the UK economy remain stable and strong.