For the umpteenth time, inflation figures have come in higher than expected. The annual rate of consumer price inflation (CPI) rose to 3.7% in April, a 17-month high. Analysts had forecast 3.5%. Core inflation, which strips out volatile energy and food prices, climbed to 3.1%. Meanwhile, retail price inflation (RPI), which includes housing costs and is used as a basis for wage bargaining, jumped to 5.3%, the highest rate since the end of the Lawson boom.
With inflation more than 1% away from the 2% target, Bank of England governor Mervyn King had to write a letter to the chancellor explaining why inflation was so high. He blamed the rise in VAT, sterling’s depreciation and high oil prices, and said inflation will fall back. The figures caused a short-lived blip in sterling’s slide to a 14-month low against the dollar as global risk-aversion grew.
What the commentators said
The Bank’s relaxed attitude to inflation is beginning to “stretch credulity”, said Daniel Pimlott in the FT. Mervyn King has now had to write seven letters in the past two years explaining why inflation is too high, but none apologising for it being too low. Last May’s Inflation Report projected inflation of 0.7% by the second quarter of 2010, a 3% undershoot.
What’s more, that forecast was based on a similar sterling level to today’s, while the rise in VAT had already been factored in, said Simon Ward of Henderson Global Investors. Higher energy prices can account for only around 0.5% of the 3% miss. The Bank has long “placed its faith” in the notion that the large amount of spare capacity in the economy would bear down on inflation, said Neil Collins on Breakingviews. But it may have overestimated this spare capacity as “its faith has not been rewarded”. And the Bank hasn’t explained why spare capacity should start lowering inflation now after hitherto failing to do so, said Michael Saunders of Citigroup.
If inflation doesn’t fall back, worries over a future wage-price spiral will mount. The Bank may also be forced to raise rates “just when the fiscal squeeze is about to hit the economy too”, said Jonathan Loynes of Capital Economics. But here’s an even bigger worry for savers, said Jeremy Warner on Telegraph.co.uk. Has inflation consistently been above expectations because of the target being “tacitly abandoned” in order to inflate our debt away? If Warner is right, it’s a key reason to hold gold.