Inflation Looks Set To Fall Fast

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Updated on 17 February 2009 | 5 Comments

UK inflation looks set to fall fast over the next year. House prices too. That's good in some ways, but it also suggests that we're entering a bad recession.

UK manufacturers reduced their prices by 1% in October. That's the biggest monthly fall since 1986. Economists had only expected a fall of 0.5% according to a survey by Bloomberg.

The fall was at least partly due to falling prices for oil and other commodities. The general economic picture probably played a part too. If customers are suffering, they may only be prepared to buy if prices are cut.

Mortgage market

We also saw some poor numbers from the mortgage market today. Nationwide said that mortgage lending had fallen 72% over the last year. The building society lent £1bn in the six months to September, down from £3.6bn a year earlier.

Nationwide also warned that it expects house prices to continue to fall in 2009 and 2010.

Libor

On the plus side, Libor - the rate at which banks lend to each other - has continued its recent fall. 3-month sterling Libor fell today from 4.49% to 4.42%. A week ago it was at 5.78%. Libor has a big impact on discounted and tracker mortgage rates, so that's good news for some borrowers.

What does this mean?

Well, consumer inflation won't stay at its current level of 5.2% for long. That's for sure.

As inflation tumbles, the Bank of England may feel able to make further cuts in the base rate which could lead to cheaper mortgages and lower returns on savings rates. So good news for borrowers. Not so good for savers.

But the overall picture worries me a lot. When the base rate is cut by a third, it doesn't feel like we're entering a short, mild recession. I fear something more serious is afoot.

More: 3% Base Rate - What Does It Mean?

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