Monday, April 14, 2008

Swedish, U.K. Inflation Rise

Both Swedish and U.K. inflation reports indicated rising inflationary pressures, just like previous reports from the Euro area and the U.S.

In the case of Sweden, the rise was much higher than most analysts (though not me) had expected. There are several different consumer price measures around, but the one the Riksbank targets rose to a 5 year high of 2.3% (and remember, that number is suppressed by technical factors). That implies that the fantasy of a rate cut later this year that most bank economists have been putting forward will remain just a fantasy. Although the most likely scenario is for the Riksbank to remain on hold, a rate hike looks more likely than a rate cut.

In the case of the U.K., the report was about producer prices which rose at their highest rate since 1991. This in turn suggests that consumer price inflation could pick up again in the U.K., something which will be further aided by the weak pound.
Given the fact that the Bank of England has a formal inflation target, and not the broad and fuzzy "full employment and stable prices" mandate of the Fed, this will greatly limit their ability to implement significant rate cuts to prevent the U.K. economy from falling into a recession.


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