After easing to 4% last month, the annual rate of consumer price inflation rebounded to 4.5% in April. That’s the highest figure since October 2008. The core rate, which strips out food and energy, hit 3.7%, the highest since the data series began in 1997. In his latest letter to the chancellor, explaining why the Bank has missed the 2% target, Bank of England governor Mervyn King again said that high inflation was due to the VAT hike, rising import prices (caused by sterling’s slide) and higher commodity prices. He expects inflation to fall back next year.
What the commentators said
The data was skewed by a late Easter, noted Danel Pimlott in the FT. Air fares soared before the bank holiday weekends, which had prompted more people than usual to go away. Still, the overall trend for now is clearly up. Previous energy and food price hikes have yet to feed through; inflation could well reach 5%.
This is getting embarrassing for the bank, as Citigroup’s Michael Saunders pointed out. It keeps putting off the date it expects inflation to return to target. Last February it said the target would be reached by the end of the year; now that’s shifted to 2013. “At some point, the bank will have to acknowledge that it is not enough just to forecast” it will hit the target. “It actually has to hit it.”
Expect the Bank to stick to its guns, said Larry Elliott in The Guardian. It is worried that a rate hike now would “tip the economy into a double-dip recession and result in the fear of deflation quickly replacing the fear of inflation”. Growth is fragile, with output still 4% below its recession peak and unemployment high. The only thing that will change its mind is a rise in pay settlements in response to higher prices. That would raise the spectre of “an inflationary spiral”. But so far pay increases have been subdued. So although inflation will head higher in the next few months, interest rates won’t follow suit.