US and UK inflation

Latest data on inflation suggests price rises are dampening in the US - opening the door for further rate cuts.

But in the UK there are fears that sustained inflationary pressures will prevent the Monetary Policy Committee of the Bank of England reducing the base rate until at least the summer. Geoff looked at this in detail earlier in the week.

This shows the importance of inflation expectations in influencing the actual rate of inflation.

In the US, the Fed is worried about that a slump in the property market and a global credit crunch is pushing the economy into recession. Recent reports have shown that US house prices have been falling, and job creation has turned negative.

Energy prices appeared to fall in the USA, although some commentators are describing this data as ‘fluky’.

In the UK, on the other hand, higher prices in supermarkets and on fuel bills are in danger of fuelling higher pay demands.

The MPC fears that recent steep increases in food and fuel prices will lead individuals and companies to expect higher inflation and that this will stoke up wage demands and encourage companies to raise prices, making this strengthening in inflationary pressure a self-fulfilling prophecy.

Those anxieties will be aggravated by the poll findings, which showed that the average expectation of inflation in a year’s time among households jumped to 3.3 per cent in February from 3 per cent in November. It was the highest figure since the quarterly survey started in 1999. Our chart below shows another inflation worry - the rising prices of goods as they leave the factor gate - measured by producer price inflation.