Britain gets a ‘nasty shock’ from inflation

Once again, monthly inflation figures beat forecasts. Consumer price index (CPI) inflation jumped a record 1% last month to an annual rate of 2.9%. Economists had expected 2.6%. Annual retail price index (RPI) inflation, which includes housing costs, rose to 2.4%, the biggest jump in 31 years. Howard Archer of IHS Global Insight Bank described the figures as a “very nasty shock”. Bank of England governor Mervyn King warned recovery will be slow as credit is set to remain tight and unemployment high. “There is a long period of healing ahead.” Households’ patience is likely to be “tested”.

What the commentators said

A sharp jump had been expected largely because last December saw the introduction of the VAT cut, says Jeremy Warner on Telegraph.co.uk. Inflation will go higher in the short-term as the VAT hike hasn’t fed through yet, but the worry now is that it may not fall back later this year as most expect. We are barely recovering, yet “prices are racing ahead”. Core inflation, which excludes volatile food and fuel, rose sharply too, to 2.8%. Ten of the 12 categories covered by the CPI were higher. We can’t just chalk it up to the pound raising import prices either: services inflation is on the rise.

Retailers may have set prices in December higher than they would otherwise in order to pre-empt the impact of the VAT reversal this month, said Ben Broadbent of Goldman Sachs. But a broader and more worrying explanation for inflation consistently beating expectations is that the amount of spare capacity in the economy, or the gap between supply and demand, is lower than the Bank thought.

The Bank has been behind the inflation curve for some time, said Edmund Conway on Telegraph.co.uk. Early last year it had pencilled in core inflation of under 1% at this stage. It may need to hike it soon. But the recovery remains “very fragile”; it would be all too easy to destroy it by “putting the brakes on too soon”, said the Liberal Democrat Treasury spokesman Vince Cable in The Guardian. With uncertainty over the inflation outlook mounting, the Bank’s job of guiding Britain out of the worst recession since the war is becoming ever harder.

 

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