Inflation spike set to trigger 'dear chancellor' letter from Mark Carney

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The Bank governor must write to the chancellor if inflation strays beyond three per cent (Source: Getty)

Mark Carney will be forced to write a letter to the chancellor explaining why inflation has soared past three per cent, if prices rise as expected in this week’s official figures.

The Bank of England governor, who just a year ago was writing to Philip Hammond about the alarmingly low level of inflation, is set to respond to the spike in costs driven by upward pressure on imports from the weak pound.

Economists have pencilled in a jump from 2.9 per cent in August to 3.1 per cent in September, which if confirmed by the Office for National Statistics tomorrow will be the biggest squeeze on living costs for more than five years.

Inflation is likely to have received a push in the past month from utility price hikes, petrol costs and a possible spike in last-minute flights following Ryanair’s cancellations.

Read more: Shop prices teeter on the verge of inflation in first time in four years

Since the Bank was granted the power to set interest rates in 1997, it has been obliged to write to the chancellor if inflation strays more than one percentage point beyond its target of two per cent.

Some economists have said this recent bounce will be short, once the spike from import costs that followed the pound’s slump drops out of the numbers.

“We believe that it is still likely that inflation will fall back markedly through 2018 as the impact of sterling’s past drop fades and domestic price pressures are limited by lacklustre growth, with only a gradual pick-up in earnings,” said EY Item Club chief economic adviser Howard Archer.

The Item Club has called on the bank to hold rates until the economy gathers momentum. Growth rose to 0.3 per cent in the second quarter.

“While it is understandable that the MPC will want to gradually normalise interest rates from their current ‘emergency levels’, we believe it would be better to do so once the economy is on a stronger footing,” added Archer.

Carney has signalled that rates will rise “in the coming months”, which has been interpreted as a hike in November. Raising rates would trim consumer spending power by raising the cost of borrowing, with possible implications for economic growth.

Like their colleagues in the United States, the Bank’s rate-setters on the Monetary Policy Committee (MPC) have stressed that the increases will be gradual, in the hope of minimising the strain to the economy as nearly a decade of ultra-loose policy comes to an end.

“We’ve been willing to tolerate inflation being over target. We’re in relatively rare company with having inflation over target,” Carney said this weekend at the IMF summit.

Read more: UK economy is main laggard as IMF hikes global growth

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