Bank of England governor Mervyn King was forced to write his sixth explanatory letter to the chancellor yesterday after inflation hit a 14-month high of 3.5 per cent in January.
The surge in the annual inflation rate, from 2.9 per cent in December, was caused by last year’s emergency VAT cut being reversed and higher oil and petrol prices. New and second-hand cars have become more expensive and last month’s heavy snow raised the price of some vegetables, with cauliflowers surging at the fastest rate since at least 1996 and the cost of carrots doubling.
Explaining why inflation has exceeded the Bank’s two per cent target by more than a percentage point, King pointed to three short-term factors, namely the VAT hike, a 70 per cent surge in oil prices over the past year and the effects from sterling’s weakness in 2007 and 2008, which is still feeding through to consumer prices. Over the past year, the pound was broadly stable.
“Although inflation is temporarily above the target, the latest Inflation Report forecast suggests that the underlying pressures are to the downside,” King wrote to Alistair Darling.
Inflation is set to stay high in coming months, which means there will be more letters from the governor to the chancellor, but is “more likely than not” to fall back to the target in the second half of the year as the short-term factors wane and the economy remains weak.
“The message from the Bank’s latest inflation projections is that the committee is in absolutely no hurry to raise rates,” said Philip Shaw, chief economist at Investec.
However, some more hawkish members of the monetary policy committee seem worried about rising prices.
MPC member Andrew Sentence has stressed the “bounce-backability” of the economy.