Inflation hits 3.2% in October

The UK Consumer Prices Index unexpectedly rose to 3.2% in October, which means Bank of England governor Mervyn King has been forced to write his fourth letter of explanation to the Treasury this year.

KING

Analysts had expected the CPI figure to remain unchanged at 3.1%.

Figures from the Office of National Statistics released this morning show petrol and diesel, financial services and games, toys and hobbies are the most significant drivers to the increase in annual inflation between September and October.

King has to write an open letter if CPI is more than 1% above the 2% target, and thereafter every three months if it fails to drop back.

In the year to October, the Retail Prices Index rose by 4.6%, unchanged from September.

The RPI 12 month rate between September and October is therefore unchanged compared with a fall of a 0.1% in the RPI 12-month rate between the same two months.

Mortgage interest payments had only a small downward effect on the change in the RPI 12-month rate between September and October.

In his letter to the Chancellor, King says: “At its November meeting, the MPC judged that it was appropriate to maintain the stance of policy that it has adopted for the past year, that is to keep Bank Rate at 0.5% and maintain the stock of purchased assets financed by the issuance of central bank reserves at £200bn.

“But the committee is ready to adjust policy – in either direction – in order to ensure that the risks to the outlook for inflation in the medium term remain evenly balanced around the 2% target.”

The MPC expects that the prospective increase in the standard rate of VAT in January to 20% will mean that inflation is likely to remain elevated throughout 2011.

King says commodity and other world export prices have increased recently, adding to companies’ costs and so to inflationary pressure in the near term.

As a result, it expects CPI inflation to remain above target, and at a somewhat higher level than expected three months ago, for a period of a year or so.

King says: “Indeed, over the next few months the inflation rate might rise further.”

Samuel Tombs, UK economist at Capital Economics, says October’s UK CPI figures show that inflationary pressures are building again.

Tombs says: “The rise in CPI inflation from 3.1% to 3.2% primarily reflected higher petrol prices, which added about 0.1% to CPI inflation.

“Nonetheless, there are some encouraging signs that price pressures remain contained in other parts of the economy.

“Food price inflation fell from 4.9% to 4.2%, despite recent trends in imported food prices. Core inflation held steady at 2.7%, perhaps suggesting that retailers are struggling to pass large price rises onto consumers ahead of the VAT hike in January.

“Admittedly, with inflation for now still high and rising, today’s figures are another sign suggesting that the MPC may have to wait a few more months before restarting QE.

“But with the recovery set to fade and medium term price pressures still relatively subdued, we still think that the MPC will sanction more QE in the first half of next year.”