Concern as UK inflation stays high

UK inflation defied forecasts last month to hold at its highest rate since May, reducing the scope for the Bank of England to inject more cash into the struggling economy.

Annual consumer price inflation remained at 2.7% after a surprise jump in October, figures released yesterday show.

Inflation, which peaked at 5.2% last year, has weighed on consumer spending, holding back the economy’s recovery from its second recession in four years.

Investec economist Philip Shaw said inflation was likely to rise above 3% over the next few months, cutting chances the bank will add to its £375bn (€460bn) of bond purchases.

“We feel a likely rise in inflation is going to result in the Monetary Policy Committee keeping policy on hold, but much depends on how weak the economy is.”

A fall in petrol prices was not enough to outweigh increased costs for electricity, gas and food. In addition, services price inflation rose to 4.2%, its highest since Dec 2011.

Inflation has been above the bank’s 2% target since Dec 2009, and the target itself has been questioned.

Last week the next bank chief, Bank of Canada governor Mark Carney, raised the possibility of central banks targeting nominal gross domestic product — a mix of GDP and inflation — rather than a single inflation rate, though he stopped short of saying this would be right for Britain.

Stubborn inflation deterred some policymakers from approving another cash boost for the economy in November. Economists are divided over whether quantitative easing (QE) does much to support growth and jobs, and some fear it has only lifted inflation.

Yesterday, the House of Commons’ influential Treasury committee called for additional evidence for its inquiry into QE, including on the policy’s effectiveness and on other unconventional policy measures.

“What role QE can play going forward and how to handle its unwinding are two important questions,” said Andrew Tyrie, who chairs the committee.

There was some good news on underlying inflation pressures from ONS data on producer prices.

Annual factory-gate inflation eased unexpectedly in November to 2.2% from 2.6% in October, while the annual rate of fuel cost inflation eased to its slowest since Feb 2011, though imported food costs rose.

— Reuters