Inflation hits highest level in six months

Julian Harris
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ABOVE target inflation rose further in November, jumping higher than economists expected, official data showed yesterday.

The news cast further doubt over the Bank of England’s loose policy and monetary stimulus.

“Another round of quantitative easing was always a long shot and this will reduce the odds still further,” said economist Andrew Goodwin of the Ernst and Young Item Club.

Consumer prices were up 3.3 per cent compared to the same time last year, above October’s rate of 3.2 per cent – and considerably above the government’s two per cent target and the EU average of 2.3 per cent.

And the retail price index (RPI), which includes mortgage payments, increased by 4.7 per cent, a jump from October when it stood at 4.5 per cent.

The Bank is watching the “uncomfortably” high levels of inflation “like hawks,” deputy governor Charles Bean said on Monday.

Yet Bean and his colleagues show little sign of increasing interest rates, blaming “temporary” inflationary pressures such as high commodity prices, the depreciation of sterling and increases in VAT.

“Measures of inflation supposedly stripping out tax effects remain very low at around 1.5 per cent,” said Jonathan Loynes of Capital Economics.

And low borrowing costs and rising productivity are actually causing falls in business prices, financial consultants Fathom reported yesterday.

However, core inflation, which excludes rising food and energy prices, remains stubbornly high at 2.7 per cent – “way higher than the equivalent measures in the US and Eurozone,” said Loynes.

Core prices are “simply not responding to the apparent spare capacity” that the Bank had assumed, he added.

Constantly high inflation could cause people to demand higher wages and places further pressure on prices, according to economists.

The risk from inflation expectations “has probably increased,” admitted Bean, who also sits on the Monetary Policy Committee (MPC).

Andrew Sentance is believed to be the only member of the MPC to have voted for an increase in rates.