Is inflation the next challenge for the Bank of England?
The Office for National Statistics yesterday revealed that factory prices rose by 0.4% in September which is in sharp contrast to the recent fall of 0.3%. When you consider that much of the increase in factory prices was actually caused by "elements of core inflation" it will be difficult for the UK government and the Bank of England to ignore this increase. So what can the bank of England do?
The main concern in investment markets is that the Bank of England will be forced to move UK base rates higher to restrict access to funding and reduce the amount of money which consumers have to spend. If this particular move were mistimed it is possible that consumers would be strangled and the UK economy move back into recession or it could come too late and release the demon which is inflation. So which is the lesser of two evils?
There is no doubt that the Bank of England is more concerned about inflation than it is about holding back any potential recovery in the UK economy. Inflation will reduce the value of the pound in your pocket at a time when prices are moving higher, something which would obviously impact upon short to medium-term economic performance. This is a very tricky time for the Bank of England and the UK government!
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