Monday 27 March 2017

BoE boss in inflation warning

Bank of England boss Mervyn King. Photo: Getty Images
Bank of England boss Mervyn King. Photo: Getty Images

Bank of England boss Mervyn King today warned UK households to expect above-target inflation to stay for "a year or so" after another sharp rise in the cost of living last month.

In a letter of explanation to British chancellor George Osborne, Mr King said inflation - which hit 3.2pc in October - could rise further still.

But he repeated assurances that factors pushing up inflation were likely only to be temporary and stuck by last week's Bank of England forecast for inflation to drop back to the 2pc target in 2012.

Mr King said: "CPI inflation is expected to remain above target, and at a somewhat higher level than expected three months ago, for a period of a year or so.

"Indeed, over the next few months the inflation rate might rise further."

January's impending rise in VAT to 20pc, as well as higher fuel costs, energy bills and the impact of a weaker pound are set to drive inflation even higher.

The Bank predicted in its quarterly report last week that CPI could spike to 3.5pc over the coming months.

But the Bank Governor said slack in the economy after such a deep recession would eventually outweigh these inflationary pressures.

He told the chancellor: "The Monetary Policy Committee's central view remains that spare capacity within companies and in the labour market will continue to put downward pressure on inflation.

"As the temporary effects of VAT increases and higher import prices dissipate, inflation is expected to fall back towards the target."

His letter comes after official figures showed Consumer Prices Index (CPI) inflation rose to 3.2pc last month from 3.1pc in September.

Mr King has to publish an open letter if CPI is more than 1pc above the 2pc target and thereafter every three months if it fails to drop back.

He has now had to pen four letters in a row to the Chancellor after CPI has remained stubbornly above target since November last year.

Mr Osborne said he noted the Bank's view that inflationary factors were temporary, but stressed the Monetary Policy Committee's remit "ensures vigilance on upside and downside risks".

Today's data from the Office for National Statistics (ONS) showed that soaring fuel costs were largely behind the CPI increase following the government's fuel duty rise on October 1.

The ONS said petrol prices rose by 2.1p a litre between September and October, while beer, wine and tobacco were also more expensive.

Press Association

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