King writes to Osborne as inflation rises

THE governor of the Bank of England (BoE) was forced to write a fourth letter to the chancellor of the exchequer yesterday as official figures showed consumer inflation rose unexpectedly to 3.2 per cent in October.

Mervyn King wrote to George Osborne saying the 0.1 per cent rise in the UK Consumer Prices Index (CPI) last month was the result of a sharp rise in fuel prices, meaning it remains more than one per cent above target.

The Office of National Statistics said the price of fuel and lubricants rose 1.8 per cent in the month partly as a result of the increase in fuel duty which came into effect on 1 October.

Meanwhile, the Retail Prices Index (RPI) inflation fell slightly to 4.5 per cent, down from 4.6 per cent a month earlier. RPI contains a bigger share of housing costs, and is used to calculate many benefits payment and pensions.

In his letter to Osborne the governor of the BoE said: “The outlook for inflation remains highly uncertain with substantial risks in both directions. The mid-term strength in inflation may be more pronounced if the prices of commodity and other imported goods and services increase further. And that would exacerbate the risk that the prolonged period of above target inflation may cause inflation expectations to rise, making it more costly to bring inflation down.”

King added that CPI inflation was “expected to remain above target and at a somewhat higher level than expected three months ago, for a period of a year or so.” It has been above target now for the past 11 months.

In his written response, the chancellor noted the BoE’s inflation forecast was “broadly in line” with those of most independent forecasters which expected inflation to return close to the two per cent target by 2012.