About U.K. & U.S. Inflation Reports
The U.K. inflation numbers were really bad. According to the EU-harmonized index, inflation rose to 3.1%-the highest ever since that index was introduced in 1997. According to the traditional (and wider) British consumer price index, the Retail Price Index, inflation rose as high as 4.8%. This forced Bank of England governor Mervyn King to write to chancellor Gordon Brown and explain why it has failed to keep inflation at 2%. According to the BBC News account it blamed the rise on rising oil prices. Which is actually pure BS. Because while oil prices did rise between February and March, they actually fell between March 2006 and March 2007, particularly in pound terms.
Anyway though, this makes a May interest rate increase by the Bank of England a near certainty, which is why the pound rose through the psychologically important $2/£ barrier for the first time since 1992.
By contrast, U.S. inflation numbers were unexpectadly low. While a 0.6% monthly increase isn't low in absolute terms, I had expected a higher number given the surge in both energy and food prices. But while energy prices in the CPI did indeed rise sharply, food prices rose a mere 0.3% and the so-called core index rose just 0.1%.
What is particularly puzzling is the weak food price increases. According to the PPI, food prices at the wholesale level rose 5.7% in the latest 4 months. Yet according to the CPI, food prices at the retail level rose just 1.8% in the latest 4 months. Even if you exclude restaurants, the increase of prices in food stores was just 2.3%. This seemingly implies that retailers have significantly reduced their gross margins. Something which is hardly sustainable. That in turn implies that retail food prices should start increasing faster in coming months, as food stores realize that the increase in input prices isn't temporary.