Pressure on Mervyn King over high inflation

Published on Wednesday 8 September 2010 18:04

BANK of England governor Mervyn King will this week write a fresh letter to Chancellor George Osborne explaining why inflation is so far above target.

Figures are set to show consumer price inflation stubbornly above the central bank's target rate of 2 per cent.

The cost of living has been held up by rising food prices, the return of VAT to 17.5 per cent, high oil prices and sterling's weakness pushing up import prices. After the annual rate of inflation moderated to 3.1 per cent in July from 3.2 per cent in June, analysts are divided on this week's reading for August.

The pressure on King could mount as economists at Barclays Capital have predicted a rise in the official consumer prices index (CPI) to 3.2 per cent.

Others, however, are predicting a slight easing in the annual rate. CPI hit a 17-month high of 3.7 per cent in April.

Howard Archer, chief UK and European economist at IHS Global Insight, expects Tuesday's data to show a further easing in inflation to 2.9 per cent. "While this would still be appreciably above the Bank of England's target rate, it would at least be a further move in the right direction and point to inflationary pressures gradually easing," he said.

Fears of a longer-lasting spike in inflation eased on Friday after it emerged that growth in factory gate prices slowed more than expected last month.

However, Barclays Capital noted that the annual rate of food input price inflation rose to 8.4 per cent in August, the highest since October 2008. "Evidence of stronger food prices has led us to raise our forecasts for inflation, and is the main reason we expect the headline rate of CPI to rise to 3.2 per cent in from 3.1 per cent in July," economists at the bank said.

Speculation is mounting that the bank will have to resume its quantitative easing programme as early as next month as the likelihood of another period of depressed economic activity increases, and with it the possibility of a double-dip recession.