Tags: Bank of England | King | UK | Inflation | Surge Temporary | Outlook | Uncertain

Bank of England's King: UK Inflation Surge Temporary, Outlook `Uncertain'

Tuesday, 15 February 2011 07:18 AM

Bank of England Governor Mervyn King said the recent surge in inflation is due to the temporary impact of a tax increase, higher commodity costs and the weaker pound and price gains will ease in the medium term.

“The MPC’s central judgment, under the assumption that bank rate increases in line with market expectations, remains that, as the temporary effects” wane, “inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead,” King said in a letter to Chancellor of the Exchequer George Osborne.

King was forced to write the letter after the Office for National Statistics said inflation accelerated to 4 percent in January, twice the central bank’s target. He’ll make a second public defense tomorrow when he presents the bank’s quarterly economic forecasts amid dissent from policy makers Andrew Sentance and Martin Weale, who have called for higher interest rates to tame price gains.

“The MPC judges that attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term,” King wrote in the letter. He said there is a “great deal of uncertainty” on the medium-term outlook for inflation.

Fiscal Plan

In his response, Osborn said “I welcome the committee’s determination to bring the risks back into balance when required to ensure inflation returns to target in the medium term.”

“The government’s commitment to delivering its fiscal consolidation plan continues to provide the MPC with the space it needs to target low inflation,” Osborne wrote. “In the current context, stepping back from our commitment to fiscal consolidation would make the MPC’s job harder but putting further upward pressure on inflation, and would risk prompting and offsetting monetary tightening such that overall, there would be little if any net impact on demand.”

Consumer prices rose an annual 4 percent in January from a year earlier after a 3.7 percent increase in December, the Office for National Statistics said today in London. That’s the highest since November 2008 and matched the median forecast of 30 economists in a Bloomberg News survey.

From the previous month, prices rose 0.1 percent, the first increase in a January from December since records began in 1997. The gain was led by gasoline, restaurants, alcohol and automobiles, which the statistics office said were particularly affected by an increase in the value-added tax rate. The cost of gasoline as measured by the consumer-price index rose to a record 1.27 pounds ($2.04) a liter last month.

Tax Increase

Osborne raised the sales tax to 20 percent from 17.5 percent last month to help reduce the budget deficit. A similar increase a year ago added about 0.4 percentage points to inflation, the statistics office said. It will publish an estimate of the impact of this year’s increase in April.

So-called core inflation, which excludes costs of energy, alcohol, food and tobacco, rose an annual 3 percent in January after a 2.9 percent increase in December.

King will present the bank’s new growth and inflation forecasts at a press conference in London tomorrow. The governor said last month that while the U.K. is experiencing a “period of uncomfortably high inflation,” he sees it “falling back quite sharply next year.”

The Bank of England’s Monetary Policy Committee held the key interest rate at a record low of 0.5 percent last week and its bond-purchase plan at 200 billion pounds. Minutes of the decision to be published next week will show if other officials joined Sentance and Weale’s push for higher rates, or Adam Posen kept up his call for more bond purchases.

The central bank’s report on the committee’s January meeting showed “most” of the panel noted that medium-term risks had “probably shifted upwards.”

U.K. Business Secretary Vince Cable said in a Bloomberg Television interview broadcast yesterday that he shares the analysis of the “doves” on the committee, saying an interest- rate increase is “potentially very difficult.”

“Although you have inflation, it’s almost entirely imported,” Cable said. “There’s not very much evidence of British inflation taking place.”

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Bank of England Governor Mervyn King said the recent surge in inflation is due to the temporary impact of a tax increase, higher commodity costs and the weaker pound and price gains will ease in the medium term. The MPC s central judgment, under the assumption that bank...
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Tuesday, 15 February 2011 07:18 AM
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