Inflation rises to 2.9% but leaves room for stimulus


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The Independent Online

Mark Carney, the Governor of the Bank of England, has avoided an embarrassing letter to explain away soaring prices just weeks into his new job after a smaller-than-feared rise in the cost of living during June.

The Consumer Prices Index rose further above the Bank’s 2 per cent target last month, increasing from 2.7 per cent to 2.9 per cent as higher petrol costs contrasted with steep falls a year earlier, and clothing stores cut prices less sharply than last year.

Inflation remains at a 14-month high, but is still below the 3.1 per cent level at which the Governor is forced to write an open letter to the Chancellor to explain the rise.

The increase was lower than City economists had expected, sending the pound down towards 1.50 against the dollar and edging gilt prices higher as traders bet that Mr Carney has more room to fire up the economy with additional money-printing.

Berenberg’s chief economist, Rob Wood, said: “Presentationally, the surprise today is more important. With no letter required, it makes it marginally easier to introduce more formal forward guidance at the next policy meeting.”

The Office for National Statistics’ figures showed petrol prices up 1p a litre to £1.34 in June, against a 4.3p fall a year earlier. Retailers last year slashed prices by a record 4.2 per cent amid panic over wet weather, but last month discounts were a shallower 1.9 per cent.

The cost of living is still more than double the average rise in wages, delivering a real-terms pay cut for millions.

The senior Bank of England official Paul Fisher said that the central bank was still some distance from reversing its quantitative easing programme.

“All the discussions that we’re having at the moment are more about whether we should be giving forward guidance and using thresholds, whether we should be giving more stimulus, rather than discussing what the exit strategy will be” he told the Treasury Select Committee.

Mr Fisher added that it would be a “great challenge” when the time came to selling the Bank’s £375bn stock of gilts without causing disruption in financial markets.