Inflation fear as VAT looms

Julian Harris
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INFLATION expectations could lead to even higher prices and wages, the deputy governor of the Bank of England said yesterday.

“Given the unexpected strength of inflation in recent months, this risk has probably increased,” said Charles Bean. The Bank will watch inflation “like proverbial hawks,” he added.

Bean was speaking after official data showed a nine per cent rise in the price of materials and fuels used by Britain’s manufacturing industry.

The figures, comparing November’s prices with the same time the previous year, were the highest since July, according to the Office for National Statistics (ONS).

Input prices for manufacturing rose 0.9 per cent between October and November, nine times faster than the previous year.

The overall consumer price index (CPI) edged up to 3.2 per cent in October, considerably above the Bank’s target rate of two per cent.

And the increase in VAT to 20 per cent, scheduled for 4 January, will stoke further inflation, the consultancy KPMG said today.

Some 60 per cent of retailers and consumer goods producers will increase prices over and above the 2.5 per cent VAT rise, they reported.

“The economic downturn placed pressure on UK businesses to blanket discount, and the intention to raise prices is an understandable reaction,” said KPMG’s Martin Scott.

Yesterday the changes in VAT rise were attacked by the accountants’ group ICAEW.

“At a time when companies are facing a tough 2011, having to change the VAT rate is not a good way to start the new year,” said ICAEW’s Ian Strange.

He added: “Many will be worried about the effect it will have on sales in the first quarter.”