Cost of living has peaked and is set to start falling – King

Inflation has hit its peak and is about to start to fall back, Bank of England governor Sir Mervyn King has claimed.

In a speech to the Institute of Directors in Liverpool last night, he launched a staunch defence of the Bank’s handling of the economic crisis but admitted September’s inflation figure of 5.2 per cent was “well above” the government’s 2 per cent target.

He will have to explain the situation in a letter to the Chancellor for the 22nd consecutive month – but he insisted the figure would begin to drop in the near future. “That is likely to be at, or close to, the peak, and we expect inflation now to start to fall back, as it did in the months following the peak in inflation in September 2008,” he said.

He defended the decision to embark on another round of quantitative easing, claiming domestically generated inflation – rather than the headline CPI figure published yesterday – remained subdued and needed a boost by increasing the amount of money in the economy.

Sir Mervyn said countries had to work together to bring about economic stability and warned that, unless other nations – particularly the eurozone – worked to create a “rebalance” of demand and a repayment of debt, the recovery could be “not merely reluctant but recalcitrant”.

He went on: “Our fate rests to a considerable extent on the policies pursued by our trading partners. That is why the Chancellor and I put such weight on this interdependence among the major economies at last weekend’s G20 meetings in Paris.

“Countries have responsibilities to each other, and we need to work with our partners overseas to find a solution to present problems.”

He said Britain’s recovery had been hampered by the crisis in the eurozone. “Our objective must be to steer the UK economy slowly back to a position of more normal interest rates and lower budget deficits,” he said. “With a lower level of sterling and a credible plan to reduce the fiscal deficit over the medium term, we were on track.

“We must use the gravity of the global crisis to provoke a bold response. We acted together in 2009; we can do so again.”

Prime Minister David Cameron’s official spokesman was forced to defend policy after he was challenged at a daily media briefing in Westminster over whether the Bank of England was right to pursue a loose monetary policy by printing money at a time of high inflation.

He said: “On the question of quantitative easing, the decision to loosen monetary policy is a decision for the Bank of England, something that they make a judgment on, based on their assessment of inflation and what is likely to happen to inflation in the future.

“The governor was explaining after that decision that they expect inflation to come down considerably in the coming months. The Bank of England assessment is that what we are seeing with inflation reflects what we are seeing in global commodity markets.”