BoE credibility at risk over inflation

 
Julian Harris
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THE Bank of England’s credibility could be on the line tomorrow if UK inflation spikes even further above expectations.

Economists expect consumer price index (CPI) inflation for December to approach 3.5 per cent, when the figure is released tomorrow by the Office of National Statistics (ONS).

And price pressures could see inflation hit twice the target rate (of two per cent) in the early months of this year, according to forecasters at ING bank.

Last week the Bank’s monetary policy committee (MPC) raised eyebrows by maintaining interest rates at the historically low level of 0.5 per cent.

“Inflation is extremely harmful. It destroys people’s savings,” Prime Minister David Cameron stated earlier this month ahead of the Bank’s latest decision.

“We don’t want to go back to having an inflation problem as we had in the past.”

The threat of lingering inflation has divided economists, and caused similar splits within the Bank’s MPC.

“Non-core factors could account for small upticks in inflation,” said Geoffrey Wood of Cass Business School, “but we’ve been hearing about supposedly ‘temporary’ factors for over two years.”

“The Bank’s forecasts have been wrong for that whole period, as have City forecasters,” he added.

Some economists have pointed to spikes in global food and oil prices, sterling’s depreciation, and the VAT hike as factors that will fade over the year, bringing inflation back below target.

“Consumer price inflation will hopefully move below three per cent late in 2011,” said Howard Archer of IHS Global Insight.

“However, the VAT rise may not actually push the annual inflation rate up in the next few months given that there was also a VAT hike in January 2010,” he added.

Global commodity prices are imposing inflationary pressures internationally, yet UK inflation remains considerably above that in peer European countries, such as Germany (1.6 per cent) and France (two per cent).

In December inflation across the Eurozone rose 0.6 per cent to 2.2 percent. Higher fuel, food, alcohol and tobacco prices blamed for the increase. That put the annual rate of inflation in the Eurozone above the European Central Bank’s medium-target rate of two per cent for the first time since October 2008.