King forecasts 5% inflation peak

12 April 2012

Inflation should peak soon at around 5%, Bank of England Governor Mervyn King said.

He made the forecast in his latest letter to Chancellor Alistair Darling to explain why inflation has risen to more than double official targets. The Consumer Prices Index hit 4.7% for August.

As the peak in inflation is higher than expected, Mr King said the Bank "has become firmer in its belief" that a period of muted growth is necessary to return inflation to target.

Surging food, petrol and energy bills are the three factors driving runaway inflation.

The trio account for 2.1% of the 2.6% rise in the CPI since December despite making up less than 20% of the index, Mr King said. In the year to August world agricultural prices rose 40%, oil prices by 60% and wholesale gas prices by 90%.

Although recent falls in oil prices will help moderate the inflation peak, Mr King said there was an increasing danger from a weaker pound. Sterling has fallen 15% since its peak last July pushing up import prices at the fastest rate for more than 20 years in the second quarter of 2008.

In response, Mr Darling said: "Clearly this is a challenging time for the UK economy as a result of global factors and individuals and families are feeling the effects. In recent weeks the government has introduced a number of policy measures on housing and energy to support the most vulnerable and those hit hardest."

The Chancellor repeated his warning that inflationary pay demands would add to the spiralling prices, saying "in both the private and public sectors pay rises must be consistent with the inflation target.

"Otherwise every penny in pay rises will be swallowed up by higher prices and we will all remember the job losses that followed in the past once inflation takes a grip."

Double-digit rises in energy tariffs sent CPI up 0.3% from 4.4% in July, according to the Office for National Statistics.

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