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Inflation seen rising above target

Consumer price inflation is expected to have risen further above the Bank of England's 2 percent target in January on the back of soaring global food and energy prices and lower-than-usual post-Christmas discounting.

Posted: Tuesday, February 12, 2008, 8:46 (GMT)
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Consumer price inflation is expected to have risen further above the Bank of England's 2 percent target in January on the back of soaring global food and energy prices and lower-than-usual post-Christmas discounting.

Economists are expecting a rise of 2.3 percent in January, according to a Reuters poll. If realised, this would be the highest rate since June.

Data on Monday showed producer price inflation at its strongest rate in more than 16 years last month, with wholesale food costs soaring an annual 36 percent.

"Rising raw food prices are increasingly feeding through to supermarket prices," said Dominic White, an economist at ABN Amro, adding that the recent fall in sterling will exacerbate price pressures.

"The problem for the Bank of England is that the inflationary impact will come through much more quickly than the growth impact," White said.

The central bank is facing the arduous task of balancing a slowing economy with rising price pressures. Evidence that inflation is continuing to rise will make further interest rate cuts harder to justify.

The Bank cut interest rates last week to 5.25 percent. Markets are expecting three further cuts before the end of the year.

Analysts said benign inflation on the high street was likely to have been offset by rising price pressures elsewhere.

"Although there were anecdotal reports that sales started earlier, there wasn't that much discounting of clothes in December, so it was probably delayed into January," said Alan Clarke, an economist at BNP Paribas.

Global energy prices have been rising steadily in recent months, with oil momentarily breaching $100 a barrel in January.

Most domestic energy providers have announced stiff price rises in recent weeks, which is likely to push inflation even higher in coming months.

Inflation has been running above target since October. Bank Governor Mervyn King has already warned that inflation may once again breach the 3 percent level, requiring him to write a letter of explanation to Chancellor of the Exchequer Alistair Darling.



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