The Governor of the Bank of England last night tried to reassure markets and cash-strapped consumers that rising prices would ease soon, after inflation hit a three-year high last month.
Defending the Bank's decision to pump more money into the economy despite rising prices, Sir Mervyn King said the eurozone crisis threatened Britain's recovery and required action by the Bank.
Sir Mervyn told an audience in Liverpool: "Inflation should fall back sharply early next year. A persistent margin of spare capacity in the economy, and the recent deterioration in demand prospects linked to the crisis in financial markets, will add to the downward pressure on inflation in the medium term.
"So it is the outlook for inflation, rather than its current rate, which explains the MPC's decision to resume asset purchases."
The Governor blamed temporary spikes in the cost of energy, VAT and imports for a surprise jump in consumer price inflation (CPI) to 5.2 per cent last month. The rate was a sharp rise on 4.5 per cent in August.
Last month's figure – a joint high since CPI was adopted in 1997 – also hits the Chancellor's debt-reduction target. September's inflation number will be used to increase benefit payments from April and state pensions.
Sir Mervyn admitted that the Bank was grappling to balance the need for short-term stimulus measures, such as the £75bn of bond purchases announced this month, and the long-term requirement to cut the country's debts.
The Bank's critics accuse it of stoking inflation, which will further erode Britain's living standards.
Rising prices have hit household budgets with a knock-on impact on retail sales, risking a further slowdown as economic growth appears to be grinding to a halt.Reuse content