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Economy in Brief

 Another Hike in the Offering for the UK Bank Rate?
by Louise Curley June 15, 2004

Consumer prices in the UK in May were 1.55% above a year ago. the largest year-to-year increase since March, 2003. The largest impact came from transportation costs for fuels and lubricants, which were 8.23% higher than in May,2003.

While inflation as measured by the consumer price index continues to be below its 2% inflation target, the Bank of England has raised the bank rate four times since November, 2003 from 3.50% to 4.50% currently. (The first chart shows the year over year change in the consumer price index and the bank rate.)

A major factor in the Bank's interest rate policy has been the rise in house prices.
The rise in house prices moderated toward the end of last year in response to interest rate increases, but began to accelerate this year. In May the Halifax index of housing prices was almost 22% above a year ago.

It is not so much the impact of rising house prices on the consumer price index, which may be small, that is of concern to the monetary authorities as it is the consequences of ignoring a speculative bubble. That the rise in house prices has the characteristics of a bubble is evident when one compares the rise in house prices to the rise in workers' earnings. (The second chart shows the ratio of the Halifax Index of housing prices to the index of average earnings. This chart ends in March 2004 as data on earnings are available only through March)

UK May 04 Apr 04 May  03 M/M % Y/Y  % 2003 % 2002 % 2001 %
CPI (1996=100) 111.4 111.0 109.7 0.36 1.55 1.36 1.27 1.22
  Fuels & lubricants 144.7 138.01 133.7 4.78 8.23 3.60 -3.16 -5.11
  Rents 124.2 124.1 121.7 0.08 2.05 1.47 2.67 3.33
                 
Halifax Housing Prices (1983=100) 514.9 499.8 422.8 3.02 21.78  18.96 20.93 8.10
                 
  Jun04 May04 Apr04 Mar04 Feb04 Jan 04 Dec 03 Nov 03
Bank Rate 4.50 4.25 4.25 4.00 4.00 3.75 3.75 3.75
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