Inflation to come in above 3%, with fresh spike predicted

Published on Wednesday 8 December 2010 14:26

INFLATION is set to remain stubbornly high in fresh figures to be published this week, giving no relief to beleaguered interest rate-setters at the Bank of England.

The Office for National Statistics (ONS) last month said the consumer prices index (CPI) rose to 3.2 per cent in October and economists expect the rate to have held firm in November.

But the Bank - whose nine-strong monetary policy committee (MPC) aims to bring inflation down to 2 per cent - has insisted that current levels of inflation are down to temporary price shocks, such as food and petrol costs.

It has already predicted a spike in inflation towards the end of the year as commodity prices continue to soar.

Philip Shaw, economist at brokerage Investec, said: "At 3.2 per cent, October's rate of CPI inflation remained elevated," he said. "Admittedly one can identify special factors that are responsible for the prevailing rate remaining so far above the target - excluding VAT and petrol, for example, CPI inflation would be very close to 2 per cent.

"But, given the amount of spare capacity and the fact that pay growth is subdued, it feels as though inflation should be much lower and we concur with the MPC in that it should come down below target in early 2012."

Shaw predicts the rate of inflation to hold at 3.2 per cent and then to increase early next year as a further increase in food costs is expected.

Howard Archer, chief UK and European economist at IHS Global Insight, also predicts no downward relief to inflation in November's data.

He said upward pressure from food and petrol costs should be balanced by heavy discounting by retailers.

But, looking further ahead, Archer added: "Consumer price inflation will hopefully move below 3 per cent late in 2011 as the temporary upward impact from VAT developments, higher energy, commodity and food prices and sterling's past sharp depreciation wanes."

Central bank policymakers were given some relief on Friday when official figures showed that the rate of factory-gate inflation slowed unexpectedly last month.

Output price growth for manufactured goods slowed to 3.9 per cent from 4 per cent in October. Economists had been forecasting an increase to 4.1 per cent. The easing was down to a smaller year-on-year increase in petrol prices.