Inflation set to stay above target

Pile of pound coinsInflation is expected to remain far above target as spiralling energy bills continue to squeeze household budgets.

The consumer price index (CPI) rate of inflation is forecast to come in at 5.1% for October, slightly down on the three-year high of 5.2% in September but more than double the Government's 2% goal.
Utility tariff hikes continued to pile pressure on consumers in the month as increases from Npower and EDF came into effect, following previous rises from British Gas, SSE, Scottish Power and E.ON.

Heavy discounting from food retailers - including the UK's biggest supermarkets, which have been engaged in an aggressive price war - is expected to slightly ease overall prices.

However the figure will still be high enough to trigger a letter of explanation from Bank of England governor Sir Mervyn King to the Chancellor - his eighth quarter in a row and 13th in total.

However, Sir Mervyn, who will be at Buckingham Palace on Tuesday to be formally knighted by the Queen, will not be surprised by the high rate of CPI as the Bank previously forecast inflation to surpass 5% before it comes down rapidly over the next year.

The Bank is expected to slash its forecasts for growth and inflation in its quarterly inflation report on Wednesday, as a raft of key indicators all point towards the economy heading into reverse.

The weaker growth outlook is likely to push down the inflation projection - but this will be slightly offset by the impact of the £75 billion round of quantitative easing unleashed in October.

Philip Shaw, chief economist at broker Investec Securities, said Sir Mervyn will be preparing "a robust defence" to justify the decision to boost QE against a backdrop of high inflation. He said: "No doubt a forthcoming drop in inflation will be the line the Governor will peddle in his eighth consecutive open letter to the Chancellor."

However evidence suggests the slight decline in the CPI rate will be the start of an extended, marked downward trend as the impact from VAT hikes drops out in 2012 and energy prices stabilise.
© 2011 Press Association
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