Economists are predicting that consumer price inflation could rise as high as four per cent – although the news is unlikely to shift the Bank of England’s view that this is a transitory surge which will soon fade away.
CPI rose sharply to 2.9 per cent in the year to December 2009 and estimates by economists at PricewaterhouseCoopers (PwC) suggest a further increase to around four per cent when January figures are released this morning.
However, regional chairman Mark Smith said although inflation will then be around twice its target level, this is argued to be no serious cause for concern as it is driven by temporary factors that should be reversed later this year.
He added: “We expect headline CPI inflation to rise to around 4 per cent in January 2010 as petrol price falls in late 2008 fall out of the annual inflation rate calculation and due to the effect of VAT going back up to 17.5 per cent from January 1.
“But this will be a purely temporary spike and we would expect inflation to be back down to its two per cent target rate by the end of 2010 and to remain at or below target during 2011.
“With earnings growth remaining very subdued and plenty of spare capacity left in the economy, we would not expect the Bank of England to start to tighten monetary policy again until late 2010 and, even then, any rise in interest rates is likely to be modest. We expect base rates to be around 1 per cent at the end of 2010 and around 2.5 per cent at the end of 2011 in our main scenario.”
Most economists also believe the rise in year-on-year inflation will be short-lived, and largely mirrors developments a year or more ago when oil prices fell sharply, only to rise, and value-added tax was temporarily cut.
Nonetheless, BoE governor Mervyn King will have to write a letter of explanation to finance minister Alistair Darling if inflation exceeds 3 percent – as expected by all 30 economists polled by Reuters last week.
Citi economist Michael Saunders said half of BoE Inflation Reports since 2004 had forecast that inflation would return to target over the coming year, yet almost all had been wrong.
“We still forecast a larger and longer CPI overshoot than the consensus and MPC expect, mainly reflecting lagged effects of the recent surge in import prices,” he said.