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 21 August 2008 20:46 BST

Inflation soars to 3%

Tuesday, 13 May 2008 16:34
Inflation rate rises put pressure on Bank of England

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Data from the Office for National Statistics (ONS) puts the consumer prices index (CPI) at three per cent in April – up from 2.5 per cent in March.

The retail prices index (RPI) – which includes mortgage interest payments - rose to 4.2 per cent, up from 3.8 per cent in March.

The rise in inflation now puts pressure on the Bank of England.

The Bank has cut interest rates three times since December – in a bid to aid the flagging economy and ease pressures from the credit crunch – but its only weapon to defeat inflation is through raising interest rates.

If inflation rises further, the governor of the Bank of England Mervyn King will be forced to write to the chancellor of the exchequer to explain what is being done to counter rising prices.

Minutes from the rate-setting monetary policy committee (MPC) meeting in April show the Bank expected high inflation to be short-lived.

However, the Bank of England will outline its full expectations for inflation tomorrow in its Inflation Report.

Paul Dales, UK economist at Capital Economist, said: "Looking ahead, it now looks likely that CPI inflation will rise to 3.1 per cent in May, triggering a letter from the BoE governor to the chancellor. And it could yet rise some way further thereafter.

"Eventually, and once energy effects fade, we think that the consumer slowdown will force retailers to absorb higher costs in their margins, resulting in a sharp fall in inflation next year. This will allow the MPC to cut rates sharply. But in the meantime, rates will continue to fall rather slowly – June no longer looks like such a done deal – exacerbating the economic slowdown."

Howard Archer, chief UK economist at Global Insight, explained the MPC now had a difficult job to do.

"Latest data highlight the extremely difficult position that the Bank of England is in. Consumer price inflation is markedly above target and rising, while the very weak BRC retail sales monitor and Rics housing market survey for April reinforce concern that the economic downturn is deepening.

"Consequently, the Bank of England will have to tread very carefully on monetary policy.

"The danger is that the retreat in inflation later on this year will be slower than had seemed likely and from a higher starting base. This means that further falls in interest rates are likely to be gradual, and possibly more back-loaded to late-2008 and 2009."

Inflation was mainly pushed up by fuel bills, food, alcohol and tobacco – the final two rising as high duties were introduced. End of story


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