Monday 27 January 2020

UK inflation rate expected to top 3pc

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 3pc.

Economists are forecasting that Consumer Prices Index (CPI) inflation surged to a 14-month high of 3.5pc in January, caused by a temporary rise in prices as a return to the 17.5pc 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 1pc 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 1pc above or below the 2pc target.

In its latest inflation report last week, the Bank warned that consumer prices could rise up to 3.5pc before falling back below the 2pc target.

But economists at Investec Securities think the official figures from the Office for National Statistics (ONS) could show a rise to 4.2pc 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 2.9pc in December from 1.9pc 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 1.8pc - due to economic slack created by the recession, even with rates held steady at the historic low of 0.5pc and its £200bn 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 2pc 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.

PA Media

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