U.K. Inflation Jumps to 3.2%


UK inflation defied expectations to rise in February for the first time in five months, triggering another exchange of letters between Mervyn King, governor of the Bank of England, and Alistair Darling, chancellor.

Inflation as measured by the consumer price index rose to 3.2 per cent in the year to last month, up from 3 per cent in January, and still more than 1 percentage point above the Bank’s target rate.

The rise in prices was mainly due to increases in food prices, the Office for National Statistics, which compiles the data, said on Tuesday.

The broader retail price index, which had been expected to move into negative territory for the first time since 1960, fell to 0 per cent as electricity and gas prices and housing costs fell.

Petrol prices and the cost of food helped keep the RPI, to which many pensions, investments and wage contracts are linked, from falling.

Mr King said in a letter to the chancellor that the failure of inflation to slow closer to target was a result of the sharp depreciation in sterling’s effective exchange rate.

Since the summer of 2007 the pound has fallen by about 28 per cent, he said, meaning that falling prices of international commodities such as oil and food had not been fully passed through to British retail prices.

Despite the sharper than anticipated rise in prices in February, Mr King said that the outlook remained for continuing rapid decline in inflation, as energy companies cut bills to reflect lower energy prices, declining economic activity opens up spare capacity in the economy and international demand slips further.

As a result of these factors, and notwithstanding the inflation outturn for February, it is likely that over the next year CPI inflation will move below target,” Mr King said.

He told the treasury select committee later on Tuesday that he was not worried about the medium-term implications further down the line.

”Even if we see significant pass through of the depreciation of sterling, it may mean inflation is close to the target rather than below it – I don’t see a large risk of inflation being significantly above it,” the governor said.

Mr King said that the Bank had begun quantitative easing – creating money to buy assets – in order to counter the substantial risks of undershooting the 2 per cent CPI inflation target in the medium term”.

Alistair Darling underlined his support for quantitative easing in his reply to Mr King’s letter.

I welcome the MPC’s intention to look through the temporary effects on inflation, and to set monetary policy in order to meet” the medium term target, wrote Mr Darling.


TradingEconomics.com, Financial Times
3/24/2009 5:55:27 AM