Inflation is back, bringing with it the prospect of enforced interest rate rises rather sooner than policymakers would wish.
The Inflation Indices for December released today showed the highest monthly increase since the 1970s. In response, gilt yields have risen sharply and so too has the pound. Many economists had predicted a big surge in inflation for December because in the same month the year before there had been a number of one off factors which had acted as a depressing influence on the indices, including the cut in the rate of VAT to 15 per cent. But the surge to 2.9% was not anticipated
The reversal of the VAT rate has not yet been factored into the indices, this will impact in Januarys figures with the result that it is more than likely that the inflation rate for January will substantially breach the 3 per cent level at which the Governor of the Bank of England is forced to write a formal letter to the Chancellor explaining why inflation is so far adrift from target.
This time last year many economists were predicting a second Great Depression, house price falls of 40% + , years of stagflation or deflation. 12 months down the line the economic experts have proved to have exaggerated considerably to the downside; house prices rose in 2009, the financial markets are still standing, unemployment has not ballooned, and inflation no deflation is our current concern.
The GDP figures for Q4 2009 are due for release on 26th January and if predictions are correct are likely to show that we are at long last out of recession and on the road to recovery. Prices are racing ahead as if the economy is again operating at full tilt.
The markets are now confidently pricing in a rise in Bank rate for later this year. There are some economists predicting rate rises before the general election.
With all this in mind, and also taking on board recent SVR rate rises by lenders the statistics are pointing towards fixed mortgage rates having reached their bottom and mortgage rate rises being just around the corner. Fixed Rates have become unfashionable recently with many opting for headline low tracker rates. But is it now prudent to lock into these historically low fixed rate mortgage products before the market shifts upwards as it inevitably will.
It is the brave borrower who is prepared to continue the wait and see policy on mortgage interest rates and those that leave it too long could be caught short.