UK Inflation Is an Illusion

Inflation in the UK rose 4.4 percent in July according to the latest consumer price index (CPI) data and the Bank of England's own inflation outlook released Wednesday is sure to paint a similar picture.

But Philip Manduca, head of investments at ECU group, told CNBC that: "it wasn't actually inflation. Inflation comes from stronger demand, finite supply, higher prices. The demand was not there outside of the commodity complex." (Watch Manduca's interview on CNBC - to the right).

"(A) lot of the inflation that's feeding through, and doubtless today there will be awful inflation numbers, but a lot of that's due to world agricultural prices, to oil prices etc. and neither of those two big dynamics really are affected by the Bank of England base rate," Stephen Robertson, director general of the British Retail Consortium, said.

We mustn’t allow "stagflation to become the ogre of UK PLC," he added.

A clutch of retailers in the UK have gone into administration since the start of the year with market capitalization down almost 50 percent, as consumer spending continues to slow as a result of the housing bubble

"(In) non-food goods we're still seeing prices tumble because of the fierce competition between the retailers," Robertson added. (Watch Robertson's interview on CNBC - to the right).

So why is there a continued focus on inflation in the UK and a reluctance on the part of the Bank of England's Monetary Policy Committee to cut interest rates?

Jon Moulton, managing partner at Alchemy Partners, said he believes that with inflation nearly hitting 5 percent the Bank "has to deal with it," bus saiod in a CNBC interview that the UK economy is caught between inflation and slowing growth and almost certainly heading for recession. (Watch Moulton's interview on CNBC - to the right).

"There is no reason to be cheerful right now about the prospects for this economy over the next year or two," Moulton said. But perhaps the dire situation of the UK economy is beyond the reach of the Bank of England.

"Do you know anybody that can borrow at base rate anyway? It's just a propaganda number, a pure propaganda number," Moulton said. "It has no real meaning … apart from gives MPC something to do, I think."

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