Tags: UK Inflation Rises Unexpectedly in October

UK Inflation Rises, BoE's King Warns It May Go Higher

Tuesday, 16 Nov 2010 07:27 AM

Britain's stubbornly high consumer inflation rate rose to 3.2 percent in October from 3.1 percent in September, driven by higher prices for motor fuel, financial services and games, toys and hobbies, official statisticians said Tuesday.

Bank of England Governor Mervyn King said the outlook remains highly uncertain, and inflation may go even higher over the next few months.

The central bank uses the annual inflation rate in the Consumer Price Index to set its inflation target of 2 percent, plus or minus one percent. It has been above 2 percent for a year.

However, the Bank of England's rate-setting Monetary Policy Committee has been torn between concerns about inflation and the slow pace of economic recovery, and has kept its base interest rate at an all-time low of 0.5 percent for months.

Analysts said the latest figure suggests the MPC will continue to shy away from raising interest rates or pumping more billions in into the economy through asset purchases, also called "quantitative easing."

The broader Retail Prices Index, which includes mortgage interest payments, eased to 4.5 percent from 4.6 percent a year earlier.

The Office for National Statistics said prices of fuel and lubricants rose 1.8 percent, and game, toy and hobby prices rose 1.9 percent. Miscellaneous goods and services, including financial services, were up 3 percent. The main downward pressure was from food products.

In its latest inflation forecast published last week, the Bank of England said it expected inflation to remain above 2 percent throughout 2011 as sales taxes and import prices rise. It said the timing and extent of easing in the rate are unclear.

The MPC's more optimistic view is that slack in the economy will eventually pull prices lower, but "the outlook for inflation remains highly uncertain, with substantial risks in both directions," King said in a letter to Treasury Chief George Osborne. King is obliged to write a letter of explanation when inflation remains at 3 percent or higher for three consecutive months.

"The near-term strength in inflation may be more pronounced if the prices of commodity and other imported goods and services increase further. And that would exacerbate the risk that the prolonged period of above-target inflation may cause inflation expectations to rise, making it more costly to bring inflation down," King wrote.

"But if the weakness in wage growth continues, once the temporary effects of (value-added tax) increases and higher import prices wane, then inflation could move significantly below the target."

Samuel Tombs, economist at Capital Economics, said "today's figures are another sign suggesting that the MPC may have to wait a few more months" before restarting quantitative easing, which paused after the bank had poured 200 billion pounds ($320 billion) into the economy.

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