Inflationplungedlastmonth,fromanannualrateof2。

4%inJuneto1。

9%inJuly。

It’sthefirsttimein18monthsthatinflationhasbeenbelowtheBankofEngland’s2%target。

Thenewscameasasurprisetomostanalysts,thoughtherewerecriesof“wetoldyouso”fromestateagentpundits,keentoseizeonanythinstrawofhopeforthehousingmarket。

Afterall,theyargue,withinflationbackbelowthetargetlevel,howcantheBankjustifyanotherinterestratehike?

Butifyoutakeacloserlookatthedata,thingsaren’tquiteasclearcutastheymightseem…

ThediveinconsumerpriceindexinflationsawCitypunditssuddenlypushingbacktheirexpectationsofaninterestratehike。

Butifwelookattheinflationfiguresinabitmoredetail,theyarelessreassuringthanyoumightthink。

Themaindriverswerefallsinfood,energy,petrolandfurnitureprices。

Likeitornot,allofthesearetemporaryimpacts。

Thepriceoffurniturefellsharply,afterrisingsharplylastmonththat’sjustastandardsummersalestactic,tojackupthepriceofitemsjustbeforetheygoonsale,sothattheylookevencheaper。

Sothat’saone-off。

Andwithoilandfoodpricesrisingmoregenerallyandwiththeimpactofthefloodsonfoodsuppliesstillsettobefeltlaterthisyearfoodandpetrolpricedeflationcan’tbeexpectedtocontinue,anditalsoseemsunlikelythathouseholdenergybillswillcontinuetofall。

Theotherpointofconcernisthatclothingandfootwearhadthebiggestupwardeffectoninflation,despitethesummersales。

Cheaperclothes,duetoagreatextenttotheimpactofcheapChineseimports,havebeenamajordeflationaryforceinrecentyears。

Yet,there’smoreandmoreevidencethatthismaybecomingtoanend。

China’sinflationratehassoaredto5。

6%,wellabovethegovernment’s3%target。

AstheChinesedemandhigherwagesandtheirownlivingcostsrise,itwillbecomemoreexpensivetoproducegoodsthere。

There’salsothesmallissueofcurrencytranslation。

AstradersspeculatethattheBankofEnglandwillnolongerhavetohikeinterestratesasrapidlyifatallthepoundhasfallenbelowthe$2mark。

Aweakercurrencydrivesupthepriceofimports,drivinginflationhighersoastrongeryuan,combinedwithdomesticinflation,couldreallydriveupthecostsofChinesegoodsforUKconsumers。

Ontopofallthis,theBankdidpointoutinitsrecentinflationreportthatinflationcouldfallsharplyinthelatterhalfofthisyear。

Evenacknowledgingthat,itstillindicatedthatatleastanotherinterestraterisewasneededtostayontopofthings。

AndweallknowwhathappenedthelasttimetheBanklostitsnerveduringarate-hikingcycle。

WhentheMonetaryPolicyCommitteevotedtocutratesbyaquarterpointinAugust2005(againstthebetterjudgementofgovernorMervynKing),itintroducedthenotionofthe“MPCput”。

This,likethe“Greenspanput”intheUS,wastheideathatattheslightesttremourinthehousingorstockmarkets,thecentralbankswouldracetotherescuewithratereductions。

ThatmoveunderminedtheBank’sinflation-fightingcredibilityandisnowwidelyseenasamistakesomethingwhichwearguedallalong。

ThelastthingtheBankwillwanttodonowistorepeatthatmistakeatthefirstsignofablipintheeconomy。

We’dstillbebettingonthenextmovebeingaratehike,ratherthanacut。

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