Inflation Pressure on Interest Rates

Inflation Pressure on Interest Rates.

The Office for Statistics has released its inflation figures for June 2014.

Consumer Prices Index (CPI) rose to 1.9% pa in June from 1.5% pa in May

Retail Prices Index (RPI), the old measure of inflation which includes property costs, rose to 2.6% pa in June from 2.4% pa in May.

Inflation has been driven by rising food and drink costs and pressure mounting on fuel prices with turmoil in the Middle East.

Comment

Trend growth for inflation i.e. the Bank of England’s target is 2.0% pa CPI.

We are just below that at 1.9% pa but if inflation continues on an upward trend with the economy overheating as supply outstrips deman, then mounting pressure builds for an interest rate increase.

House price inflation, which is only part of the old RPI, has seen record property price increases with London topping 20% growth in just a year and averages around the country hitting 10.5%.

Already, we are seeing investors start to price the likelihood of interest rate increases with currency speculation driving the £1 up to five years highs against many international currencies.

Plan for interest rate rises, they are inevitable.  For your mortgage, start budgeting now, pay more to get used to high mortgage rates, for savers do not lock into loonger term fixed rate bonds when rates are low unless of course the rate offered is what you are happy with.