Inflation has again proved stronger than expected. The annual rate of consumer price inflation (CPI) rose to 3.4% in March, compared to 3% in February. Analysts had expected an average of 3.1%. The retail prices index, which includes housing costs, jumped to 4.4%.
What the commentators said
“There’s no need to panic,” said Jonathan Loynes of Capital Economics. The rise is due to higher petrol prices and the lagged effects of the VAT rise. Inflation should fall back later this year, thanks largely to the “vast amount” of spare capacity in the economy due to the recession. The Bank of England takes a similar view, but is it being complacent?
A key worry is whether the amount of spare capacity, or output gap (see page 49), has been overestimated. Neville Hill of Credit Suisse points out that in the past year there have been twice as many upside surprises from CPI than downside; core inflation (CPI minus food and energy) is proving surprisingly sticky; and inflation in the services sector has risen to 3.3%. “It’s not evident that spare capacity… is still bearing down on domestically generated inflation.”
With inflation “uncomfortably high”, as Nationwide’s Martin Gahbauer put it, the Bank of England may “come under greater pressure” to raise interest rates from their current “emergency” lows in order to keep inflation near the 2% target. As earlier-than-expected rate hikes would coincide with a fiscal squeeze, says Hugo Duncan in the Evening Standard, this could snuff out a fragile recovery.