Inflation jump to trigger Bank explanation

|PIC1|Inflation is expected to have risen further above target in May and prompt the Bank of England to explain why for only the second time since it was made independent in 1997.

Mervyn King, the bank's governor, is required to write an open letter to the government if consumer price inflation moves more than a percentage point from its target rate of 2 percent. The letter should explain why inflation has intensified and what the Bank is doing to address it.

Consumer price inflation jumped to 3 percent in April and analysts expect soaring petrol and food prices to have lifted it further, to 3.2 percent, in May. Such a reading would be the highest since comparable records began in January 1997.

In the past year, oil prices have nearly doubled while the cost of basic food staples such as rice, wheat and milk have soared.

A government source told Reuters on Friday that it was "preparing for an open letter" from the Bank.

"It wouldn't be surprising given recent trends on world food and fuel prices," the source added.

King's letter and the government's response, if needed, will be published at 10:30 a.m., an hour after the inflation figures are released.

SUSTAINED PRESSURE

The last time the Bank was forced to explain itself was in April last year after inflation for the previous month spiked to 3.1 percent. Then only one letter was required as price pressures subsided quickly.

This time round it may be different. Bank policymakers have indicated that inflation pressures will continue to build and some economists expect inflation to peak above 4 percent before the end of the year.

Under current protocol, the Bank must pen a new letter every three months that inflation deviates by more than a percentage point from its target.

"We expect the Governor to put pen to paper three times over a period where inflation exceeds 3 percent for eight months," said Philip Shaw at Investec.

Recent inflation indicators have made for grim reading. Factory gate inflation hit a record high of nearly 9 percent last month, firms' costs surged at their fastest rate in at least 22 years and Britons' expectations of future inflation also hit a series high.

The deteriorating inflation outlook has been mirrored in the money markets. A month ago, investors were expecting the next move in rates to be a cut. Now they are betting on a series of rate increases before the end of the year.

"Having leapt unexpectedly sharply in April, there is a serious chance that consumer price inflation will move higher in May," said Vicky Redwood at Capital Economics.

"It is possible that April's rise will turn out to be the start of an upward trend as the very sharp increase in core factory inflation finally starts to work its way into the high street."