Will the Rise in UK Inflation Affect Interest Rate Projections? - City Index

LONDON, June 29, 2011 /PRNewswire/ --

UK inflation hit a new two-and-a-half year high of 4.5% in April, whilst core prices rose at a record pace, hitting their highest levels since records began in January 1997. Joshua Raymond, Chief Market Strategist of City Index (http://www.cityindex.co.uk/), analyses the increase and its likely impact on the UK economy:

"Most of the increase is weighted in big increases in alcohol and transport," states the spread betting expert. "Alcohol and tobacco prices rose on the month nearly 5% and annually reached 8.9%, giving the component its highest annual inflation in prices since records began."

And what of the effect on interest rate projections? Mr. Raymond continues: "Should inflation rally past the 5% mark over the summer, it could send alarm bells ringing within the MPC that a rate hike may be warranted to curb its excessive escalation before the current market consensus of a hike to come at end of the year."

"Having said that, the language used in Mervyn King's now customary letter to the Chancellor of the Exchequer, George Osbourne, appeared to quash that potential by stating, "The MPC judges that attempting to bring inflation to the target quickly risks generating undesirable volatility in output." So in truth, the inflation figure, whilst rising more than expected, may actually have changed very little."

Spread betting and CFD trading allow traders to go long or short on a range of UK and US interest rates including Euribor, Eurodollar and Short Sterling. City Index spreads for short sterling start from just 0.02 points.

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