Inflation close to double Bank's target

Inflation rose from 3.3% to 3.7% in December. The Bank of England's target is 2%. Do you want to tell them or shall we?

by Dave Waller
Last Updated: 06 Nov 2012
The annual rate of consumer price inflation rose from 3.3% to 3.7% in December, its highest level since April 2010, thanks to higher food and energy costs. Which means we’re moving incredibly close to twice the Bank of England’s 2% target for 2012. That’s set to inflate the nation’s sense of injustice as it stares down the barrel of a load of public sector cuts.

More galling: the news is worse than expected. The average forecast of economists was for inflation to remain unchanged. But with petrol prices hitting £1.22 a litre, and gas bills and global food prices soaring, the rate’s been rising like American celebrity ire at a Ricky Gervais speech. Prices went up 1% between November and December alone – the largest month-on-month rise on record. Usually it’s more like 0.5 percentage points.

But while it’s looking painful for us consumers, you wouldn’t want to swap seats with the bean-counters at the Bank of England. They’ve been saying the rate will fall below 2% in 2012. Those claims are looking ever more far-fetched: analysts are saying we’re well on course to exceed 4 per cent year-on-year inflation by February.

With quantitative easing surely on the way out, the pressure’s on to finally up the interest rate, although no one seems sure when this is going to happen. The Bank's monetary policy committee (MPC) is of course suggesting it doesn’t need to act for a while, happily pinning the blame on ‘temporary factors’ like the forthcoming VAT hike and rising commodity prices. It doesn't seem to matter that such factors are looking decidedly less than temporary - with rising populations, it's hard to imagine food and oil prices dropping any time soon. And the BoE probably doesn't want to hear how the cost of living is rising more slowly elsewhere: across the EU, inflation was a comparatively luxurious 2.3% in November.

Meanwhile the retail price index, to which many public sector contracts and benefits are linked, rose more gently from 4.7% to 4.8% – but that’s still the highest rate since last July. Its rise was less marked than that of the CPI as the weighting of the air fares element being reduced in the RPI but increased in the CPI. House prices and car insurance prices also fell.

The MPC is saying it can’t do anything about the current figures – preferring instead to look two to three years ahead, as that’s what it can control. Trouble is, the public will be forced to swallow a lot of unsavoury news in the meantime and will need someone to blame. The Bank of England may be feeling somewhat deflated right now.

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