Rising inflation in the UK and China!

In the last week we have seen confirmation that the risk of inflation remains a serious problem in a number of parts of the World. The latest UK data showed that annual consumer price inflation rose to 3.7% in December 2010. This is particularly worrying as it was clearly not forecast by the Bank of England. Back in early 2010 the Bank seemed confident that UK inflation would be back under 2% by year end. Not surprisingly this has led to widespread criticism of their forecasting record which will seriously damage the credibility of the Bank of England. It still argues that this latest rise in inflation is mainly due to a number of short-term factors. However, the financial markets are now anticipating that the UK central bank will be forced to start raising short-term interest rates by the early summer.

At the same time there are clear signs that the overheating Chinese economy is being reflected in rising price pressures with annual inflation hitting 4.6% in December 2010. This official estimate is widely seen as an underestimate of the Chinese inflation as national and regional government officials are still able to intervene to limit some prices rises. There is even greater concern about the real estate market where some areas showing annual price rises of close to 50%. If there was a sudden and sharp correction in the Chinese property market this could have a dramatic impact on the financial security of the banks which have financed this boom. Against this background the Chinese authorities will be keen to see a gradual rather than any sharp economic slowdown.