UK inflation expected to rise above 3%

Bank of England Governor Mervyn King will send a letter of explanation to the Chancellor after figures due to be released show a spike in inflation above 3%.

Economists are forecasting that Consumer Prices Index (CPI) inflation surged to a 14-month high of 3.5% in January, caused by a temporary rise in prices as a return to the 17.5% VAT rate and higher petrol costs took effect.

Mr King has already indicated he will have to write to Alistair Darling explaining why inflation rose 1% above target in January, with inflation having already surged by a record rate in December.

The central bank boss must write to the Chancellor when CPI hits more than 1% above or below the 2% target.

In its latest inflation report last week, the Bank warned that consumer prices could rise up to 3.5% before falling back below the 2% target. But economists at Investec Securities think the official figures from the Office for National Statistics (ONS) could show a rise to 4.2% as VAT and petrol pressures are compounded by an impact on seasonal food prices of last month’s heavy snow and ice.

The CPI measure of inflation soared to 2.9% in December from 1.9% in November – a bigger-than-expected rise that prompted speculation of an earlier interest rate rise. However, recent Bank forecasts signalled the cost of borrowing was unlikely to rise for some time, despite saying prospects remain “unusually uncertain”.

Inflation is predicted by the Bank to fall below target – at around 1.8% – due to economic slack created by the recession, even with rates held steady at the historic low of 0.5% and its £200 billion quantitative easing programme left in place.

Howard Archer, chief economist at IHS Global Insight, said inflation would probably start to fall back swiftly from the second quarter onwards.

He said other one-off factors that will have impacted the January inflation figures included lower levels of post-Christmas discounting on the high street this year compared with 2009, when retailers were particularly worried about consumer confidence.

“CPI could well be back under 2% by the end of the year – given that oil prices bottomed out early in 2009 and then firmed, base effects should become more favourable,” he added.

Source: Association Press