Inflation hits 17-month high

18 May 2010

Economists have played down fears that interest rates will soon be on the rise after inflation shot up to 3.7% in April - its highest level since November 2008.
The larger-than-expected rise in the headline rate of inflation (consumer prices index (CPI)) was driven by big rises in the taxes levied on alcohol and tobacco as well as higher prices for women’s clothing and food prices.
Meanwhile, the retail prices index soared to 5.3% in April – its highest level since July 1991 – from 4.4% in March.
The rise in inflation means Bank of England governor Mervyn King will have to write a letter to new Chancellor George Osborne explaining the rise as it takes inflation further above the Bank’s 2% medium-term target.
However, City commentators remained largely unconcerned by today’s sharp lift to the CPI.
Howard Archer, chief UK and European economist at IHS Global Insight, says he believes today 3.7% figure will mark inflation’s peak as temporary upward pressures start to unwind.
Oil prices fell back at the first quarter of 2009 and so negative base energy effects should now be coming to an end. Meanwhile, the pound’s sharp depreciation should now have largely finished feeding through to push up prices.
Although today’s figures may lead to some heightened doubts within the Monetary Policy Committee (MPC) as to whether CPI will fall back as quickly as expected, Archer believes the central bank still looks unlikely to raise interest rates anytime soon.
However, the predicted rise in VAT to 20% to be announced in the emergency Budget could lead to a short future spike.
Jonathan Loynes, chief European economist at Capital Economics, adds the latest figures will not lead the MPC to panic.
“For now at least, the Committee remains confident – rightly in our view – that the large amount of spare capacity in the economy will eventually bear down strongly on core inflation – these things often take time.
“Admittedly, the figures won’t ease the concerns amongst one or two MPC members that inflation expectations might start to creep higher – particularly if a budget VAT rise pushes inflation itself even higher. But there is little evidence of that yet.”
With major fiscal tightening now on the cards he believes interest rates will stay where they are “for a long time”.

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