The Bank of England's forecasts for a sharp fall in inflation this year were dealt a serious blow yesterday as official figures showed it actually rose in March for the first time in six months.
The Consumer Prices Index rose to 3.5 per cent from February's 3.4 per cent, moving further away from the central bank's 2 per cent target, thanks to the rising cost of essentials including bread, fruit and clothes.
Economists said this reversal of the downward trend cast doubt on the Bank's forecast that inflation would fall below its target by the end of this year. Barclays Capital now reckons that prediction is almost a whole percentage point out.
This poses a dilemma for the Bank: the economy remains weak and arguably in need of more stimulus, but if inflation is back on the climb, it is hard to justify pumping in more money through quantitative easing. Hawks on the Bank's monetary policy committee including its chief economist, Spencer Dale, and Martin Weale are already warning about price rises following the £325bn of QE in operation.
Alan Clarke, an economist at Scotiabank, said: "We're clearly not growing fast enough, but uncomfortably high inflation is a significant obstruction to more QE. It's not going to be an easy decision for the Bank of England at its next meeting in May."
The MPC member Adam Posen, an advocate of more stimulus for the economy, said the Bank would not change its views on the strength of just one month's data, but he added: "If the core inflation rate doesn't come down on a sustained basis, then we have got to rethink."
Some economists argued that March's figures would prove to be a statistical anomaly caused by an unusual fall in food prices a year earlier. Others warned of further price pressures.
Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said: "Higher oil prices are clearly having an impact and, with retail petrol prices climbing recently, inflation is likely to remain high in April."Reuse content