Business World

Monday 19 February 2018

King blames hike in UK inflation on VAT

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

Jamie Grierson

Inflation would be below the Government's 2pc target if it was not for the increase in VAT earlier this year and rising energy and import prices, Bank of England Governor Sir Mervyn King said today.

In a letter to Chancellor George Osborne, Sir Mervyn claimed the factors were forcing up CPI inflation - which reached 4.4pc in July - and reiterated the Bank's belief that the rate will hit 5pc later this year before pulling back.

The Governor is required to write to the Chancellor if CPI inflation is more than 1pc higher than its 2pc target three months after his last correspondence.

In his seventh successive letter of explanation, and 12th in total, Sir Mervyn said high inflation reflected "the increase in VAT to 20pc and past increases in global energy prices and import prices".

He added: "Although it is impossible to identify the effects of those factors with precision, it is likely that inflation would be below target in their absence."

The Governor said inflation will be driven up by increases in utility bills - following price hike announcements by four of the "big six" suppliers - and the continued effect of VAT and commodity prices.

Sir Mervyn said the biggest risks facing the UK economy came from overseas.

But with the UK facing a period of continued sluggish growth, the Bank expects inflation to fall below the 2pc target to 1.8pc in two years' time.

July's inflation figures revealed clothing and footwear increased by 3.1pc on an annual rate - the highest annual surge since records began in 1997, the ONS said.

Housing, water, electricity, gas and other fuels increased by 4.6pc on an annual basis, the highest increase in two years.

Elsewhere, while clothing, furniture and household goods prices fell on a monthly basis compared with June, the decrease was much smaller than a year ago - applying upward pressure on the overall cost of living.

Food bills were 0.3pc higher month on month and 6.2pc higher compared with a year ago, while alcohol and tobacco were 0.6pc higher on a monthly basis and 10.3pc higher than last July.

July is usually a big sales season, the ONS said, but there was evidence that retailers brought their sales forward to June to attract cash-strapped customers.

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