UK inflation will fall back to target, says Bank chief

  • 1 March 2011
  • From the section Business

The UK's inflation rate will fall back to its target rate, but the timing of this fall is uncertain, the Bank of England governor Mervyn King has said.

He said the Bank's nine rate-setting body members agreed it would fall, but not by how quickly nor how far.

His comments came as petrol prices hit new highs and a report said the UK had disproportionately high food prices.

Mr King was giving evidence about the economy to MPs on the Treasury Committee.

He told them: "The broad judgment of the [Monetary Policy Committee] is that the increase in inflation would be expected to come back towards the target and the debate on the [MPC] is not about whether that will happen, but it's about the speed and the extent at which it will come back to target."

The minutes from the MPC's February meeting had shown that three of the nine members had voted in favour of raising rates from their current historic lows of 0.5%, in order to cool inflation.

Andrew Sentance voted to raise rates to 1%, while Spencer Dale and Martin Weale backed an increase to 0.75%.

Consumer price inflation is currently running at 4%, double the Bank's target of 2%

Up and down

Mr King accepted that oil prices had risen much faster than the Bank had assumed in last month's inflation projections, but he said that some of the factors driving prices up, such as tensions in the Middle East, could also fade quickly.

He said: "An awful lot will hinge on how far this rise in oil prices persists, whether the situation in the Middle East becomes clarified and it falls back again," he said. "These are very uncertain factors."

Although he gave no firm indication that he thought inflation was likely to be a problem that needed higher interest rates, he acknowledged that it was likely to be above target for many months.

When CPI inflation remains above target for a certain period, the governor of the Bank of England has to write a letter to the chancellor explaining why.

Mr King told the Treasury Committee he expected to be doing that for some months to come.

"I would certainly expect to be writing letters throughout the rest of the year because the measure which determines the letter is the increase in prices over the previous 12 months."

He said he believed inflationary pressures would be "pretty much back to target" within the middle of this year although that would not be reflected in the annual rate "until well into 2012".

Food price inflation

Key current pressures include food and fuel prices.

According to the research group Experian Catalist, the average price of unleaded petrol climbed above 130p per litre for the first time to 130.3p on Monday.

The average diesel price is now 135.44p.

Separately, a report on food price inflation in the UK from UBS indicated that retailers in the UK were raising food prices faster than inflation.

UBS said commodity price inflation over the past few months would justify a 3-3.5% increase in processed food prices, but it found that supermarkets had increased prices by 6-6.5%.

The BBC's economics editor, Stephanie Flanders, said that was a puzzle.

"UK manufacturers are just as subject to global competition now as they were in the mid-noughties.

"When you consider the subdued state of the economy, you would think they would be even less able to pass on cost increases in 2010 than they were in 2006," she said.

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