Kate Barker, a member of the Bank of England's Monetary Policy Committee, appeared yesterday to rule out voting for future interest rate cuts because of the danger they could spark inflationary pay rounds.
One of the MPC's traditional doves, Ms Barker said the base rate was around "broadly neutral ... or slightly accomodative". Speaking at a CBI dinner in the West Midlands, she said a rate cut could risk sparking "second-round effects on wages".
She predicted higher utility bills would keep CPI inflation "a little above" the 2 per cent target in the coming months but said unless UK growth picked up, inflation would be below target in 18 to 24 months.
Despite rising energy costs, which are putting pressure on consumer discretionary spending, she said there was no sign of higher bills translating into higher pay. In any case, she believes inflation pressure from soaring energy and metals prices will ease. "A repetition of recent steep rises seems unlikely," she added.
She said she had sympathy with City economists sceptical at the MPC's growth projection, adding: "My central projection would indeed be a little lower, chiefly reflecting more caution about the UK consumer." She said: "Recent evidence suggests the strength of consumption in the fourth quarter of 2005 may have faded a little." Concerns over high unsecured debt levels and publicity around possible pension shortfalls could encourage people to save more, she added.
Meanwhile new official figures released yesterday showed that Gordon Brown's tax breaks had helped keep inflation down. A new index showed inflation would have been about 0.2 percentage points higher over the past two years if indirect taxes were stripped out.
Although the ONS declined to confirm this, it is likely the decision to freeze fuel duty three years ago helped drag down inflation.
The figures showed transport displayed the biggest single gap between the two measures, of 0.1 percentage points as petrol prices rose but duty stayed static.
Separate figures showed the inflation rate the Bank targets rose to its 2 per cent target in February from January's 1.9 per cent. The ONS said the main factor was a rise in computer games, which fell a year ago. It pushed the inflation for goods to 0.6 per cent from 0.3 per cent.
"The deflation on the high street has eased," John Butler, the UK economist at HSBC, said. "The MPC are clearly concerned this positive impact is starting to disappear as import prices are rising, potentially pushing inflation persistently above the target."