Inflation set to hit 4.8pc, warns Lloyds

 
Julian Harris
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INFLATION in the UK will reach 4.8 per cent this year, a leading City price watch monitor said yesterday.

The release came ahead of tomorrow’s Bank of England announcement on interest rates.

Starting today, the monetary policy committee (MPC) will discuss whether to begin normalising Bank rate, after more than two years at the historic low of 0.5 per cent.

“The annual consumer price index rose from four per cent to 4.4 per cent in February -- the 41st consecutive month above the government’s two per cent target,” the report from Lloyds said.

“Although we expect inflation to drop back over the medium term, there is a clear risk that rising inflation and inflation expectations become entrenched,” said Lloyds’ economist Adam Chester.

Arguably the largest risk to stable prices in the UK comes from the Bank’s policy of quantitative easing, the report said.

“An extra £200bn of cash (13 per cent of nominal GDP) has been injected into the economy,” it states.

“So far, it appears this money is largely lying idle in commercial banks’ reserve accounts but if this money starts to become more actively employed, inflation pressures could escalate rapidly.”

And on top of “some tentative evidence” of inflation expectations following through to wage settlements, the UK also faces a risk from more persistent input price inflation, the report said.

The risk from imported inflation could come from “a sharp depreciation” in sterling, or if “pressures on global spare capacity continue to rise.”

However, Lloyds still expects inflation to drop below two per cent by the summer of next year.

The Bank of England’s chief dove, Adam Posen has said he will not run for a second term at the Bank if inflation persists above the two per cent target rate through to the middle of 2012.