There was some good news for inflation watchers however, with the release of the Office of National Statistics’ changes to the basket of goods that go into the price indices. A number of newish technologies have gone into the basket – for example recordable DVDs, SatNav and digital radios. These items are all made in China and the Far East and are likely to experience price deflation if history is any guide. In addition, the weighting of fuel and light has increased (to 3.9%), and given that a number of energy suppliers have announced price cuts to come in later this year, this is also likely to put downward pressure on the inflation numbers.
Nevertheless, with CPI heading back towards the level where the Bank of England has to write that letter to the Chancellor, at least another rate hike is likely – in my view the only things that would keep them on hold are a further selloff in global equities, or signs of an imminent US recession.