Forums Forums National News 'Depressing' Inflation Report Due

..from Sky News....

Its not looking good...

For those in the City of London still hoping that the worst is already over for the British economy, today's long-awaited quarterly inflation report from the Bank of England will make for depressing reading.

Growth forecasts will be cut to no more than 1%, down from 1.5% and much less than the Treasury's ludicrously over-optimistic 2.5%; predictions for inflation will be increased after yesterday's devastating figures showed a surge to 4.4%; and Governor Mervyn King will be forced to acknowledge the disastrous impact on confidence of the accelerating house price crash.

If he has the courage to tread on Chancellor Alistair Darling's toes, King might even warn that the budget deficit is starting to spiral out of control, a development which could force up long-term interest rates and bond yields and further squeeze growth.

The truth, as King will be forced to admit, is that the bank failed to predict the speed and extent of the downturn in its last report in May.

King was right to warn repeatedly over the past year or so that the Nice decade - during which we enjoyed an unusually pleasant Non-Inflationary Constant Expansion - was now over; but even he didn't predict the dramatic drop in house prices of the past few months or just how badly the banks would be burnt by the credit crunch.

The markets are braced for inflation of at least 5% by the autumn, partly because increases in gas and electricity prices have taken place earlier than expected; there is a good chance that the inflation report will be almost as hawkish.

But the monetary policy committee, whose job it is to set interest rates, is unlikely to dare tighten monetary policy for fear of turning a downturn into a bitter recession. Economic growth is likely to remain extremely weak next year.

To make matters even more difficult for the bank, consumers no longer believe the official statistics for inflation and especially the consumer price index (CPI).

Other measures of price rises show that inflation is surging at an even faster rate.

The RPIX measure - the all items retail price index excluding mortgage interest payments - reached a crippling 5.3% in July, up from 4.8% in June.

Most consumers feel that the cost of living is going up at an even faster rate.

If they start to demand larger pay increases to catch up with increasing prices, the risk is that inflation could become entrenched and self-fulfilling.

If this were to happen, only very steep hikes in interest rates and the inevitable recession that would follow could then ensure a return to price stability.

This would be a disastrous scenario and one that King will be keen to avoid at almost all cost.

This is not to say there will be no good news at all in the report.

The slump in sterling against the dollar is helping exporters, even though it is hitting tourists; the drop in the price of oil will help manufacturers and consumers; and the prices factories are paying for raw materials have fallen for the first time in almost a year.

But none of these factors will be enough to rescue an economy on the brink of its first recession since the early 1990s.

The optimists have been warned.

Nice to see the art of composing and typing out a good letter has not been lost !

Good one !!