UK inflation surge to force Bank of England explanation
Britain’s January inflation numbers will make difficult reading for the Bank of England at a time when its inflation-fighting credentials are increasingly coming into question.
Figures at 9:30 a.m. are forecast to show annual consumer price inflation surged to 4.0 percent from 3.7 percent in December, its highest level since November 2008 and double the central bank’s target.
Retail price inflation, which some economists consider a more accurate gauge of the cost of living, is forecast to rise even higher, to 5.1 percent.
The central bank is nervous that an interest rate rise could snuff out a fragile economic recovery. It has kept rates at a record low 0.5 percent for almost two years, arguing that inflation was being driven by one-off factors such as rises in sales tax, currency weakness and spikes in commodity prices.
Building price pressures, however, have encouraged investors to bet that an interest rate rise will not be long in coming. Money markets are pricing in a quarter-point rate rise by May, and at least one more by the end of the year.
“Given UK markets’ current sensitivity to inflation, January’s release is a very important one,” said Philip Shaw, an economist at Investec.
Shaw believes retail price inflation could be as high as 5.5 percent, a level not seen since 1991.
TAX CHANGES
January’s figures are more tricky to forecast than normal because they will be affected by several tax changes, the biggest of which being the rise in VAT — from 17.5 percent to 20 percent — on January 4.
It is hard to calculate in advance how much of that tax rise was passed on by retailers. Some may have raised prices ahead of that date while others may have decided to absorb some of the tax in a bid to lure in shoppers.
Oil, commodity and food prices are all expected to have had a significant upward impact on the index last month.
Inflation has now been at least a percentage point above the Bank’s 2 percent target for an entire year, and Governor Mervyn King will be forced to write another letter to the government explaining what remedial action will be taken.
That letter will be published at 10:30 a.m., an hour after the inflation figures are released.
King has so far blamed the rise in inflation on external factors, which he says the Bank can do nothing about, and one-off tax changes, whose effect on inflation will be temporary.
However, building pipeline pressures and growing concerns the Bank is going soft on inflation mean King might adopt a harder stance.
The Bank will publish new quarterly growth and inflation forecasts on Wednesday and investors will scrutinize King’s comments for clues on what those forecasts will hold.
The Bank may be prepared to look through short-term price pressures but any indication that medium-term price pressures are rising would be seen as a signal that rates will rise sooner rather than later.
Source: Reuters