Base rate may rise sooner than expected

by Ed Bowsher on 16 June 2009  |  1 comment
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Today's inflation numbers mean that interest rates may rise earlier than expected.

Today's inflation numbers were slightly higher than I expected.

For the year to May, prices rose by 2.2%. That's according to the government's favourite measure of inflation - the Consumer Prices Index (CPI). A Bloomberg survey revealed that economists had expected a 2% rise.

Another widely used measure - the Retail Prices Index (RPI) showed a 1.1% fall over the year.

Now I still expect inflation to carry on falling for a while yet, but it is a bit surprising that we've only seen a small fall in May. The slowdown in the rate of decline may be due to the pound's weakness over the past year. If the pound is low, imported goods cost more in the UK.  

But I can't help wondering whether today's numbers are also a very early sign that Mervyn King has overdone it on the quantitative easing front. I stress that it's far too early to know for sure, but it's an intriguing thought.

And if inflation carries on remaining stubbornly higher than expected, we may see a base rate rise in the autumn. Maybe even two or three rises before the end of the year.