Bank urged to remain calm as inflation rises

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Higher fuel prices, more expensive computer games and increasing bank charges pushed inflation higher in October, according to the Office for National Statistics.

The rise in consumer price inflation (CPI) from 3.1 per cent in the year to September to 3.2 per cent in October, was slightly above expectations.

Inflation has remained above the official 2 per cent target for almost a year. The retail price index fell back marginally, from 4.6 to 4.5 per cent, largely due to depressed house prices, which were rising this time last year. These are not included in the CPI.

As inflation remains more than 1 per cent above the target, the Governor of the Bank of England, Mervyn King, has been obliged to write another open letter of explanation to the Chancellor, George Osborne – the ninth such missive since the spring of 2007 and the fourth this year.

In his letter, Mr King repeated his long-held belief that temporary factors such as high commodity prices and the increases in VAT in January (and, prospectively, next January) have kept inflation high. He echoed the view in the Bank's latest Inflation Report, saying that "the chances of inflation being above or below the target in the medium term are evenly balanced".

The Bank's forecasts are for inflation to remain above 3 per cent for the whole of next year, and about 3.5 per cent for much of the earlier part of 2011.

Without the VAT rise, inflation would now be 1.6 per cent.

Mr King added: "The Monetary Policy Committee's central judgement continues to be that the temporary impact of those factors has offset the downward pressure on inflation from spare capacity... but considerable uncertainty remains about that impact."

Observers said that the letter signals no imminent change in policy and a speech by external Monetary Policy Committee member Martin Weale earlier this week also reflected the very balanced state of opinion in the MPC. Minutes of the last MPC meeting, to be published today, will probably reveal another three-way split.

Continuing high inflation is also putting a strain on household finances and adds to pay pressures. TUC General Secretary Brendan Barber said: "This is bad news for struggling families around the UK, and the VAT increase in January will add further to inflation.

"With 80 per cent of pay deals offering less than a 3 per cent pay rise, a local government pay freeze and another imminent pay freeze for anyone on over £21,000 in the rest of the public sector, the figures mean a harsh cut in living standards and will take much needed spending power out of an already fragile economy."

Business leaders, meanwhile, urged the Bank not to overeact. David Kern, the chief economist at the British Chambers of Commerce, said: "The threat of a major setback to growth remains much greater than the risk of a surge in inflation, and pressures facing businesses and individuals are likely to increase over the next year."