Inflation set for sharp fall after energy bill cuts
But stubbornly high prices hamper Bank of England policymakers
Sunday 20 May 2012
The Bank of England will gain some respite in its battle against the rising cost of living this week as figures reveal a sharp fall in inflation during April.
The Bank's inflation benchmark, the Consumer Prices Index, is predicted to slip back to 3.1 per cent after March's first rise in six months to 3.5 per cent.
The fall would still leave the cost of living well above the Bank's2 per cent target, where it has been stuck since 2009, due to VAT hikes and rising global commodity prices.
The Bank has warned that inflation is unlikely to drop back to the target until the middle of next year.
The improvement is likely to have been driven by the last of the price cuts from the energy companies. The Easter holiday falling two weeks earlier than last year also means a longer post-Easter sales period as well as cheaper air fares, said Lloyds Bank Corporate Markets' senior UK economist, David Page.
But Mr Page expects April's fall to be unwound in May as higher water bills kick in. "The general trend is that there are some upward pressures coming through. We are expecting sticky inflation above 3 per cent throughout the summer."
Falling oil prices should eventually feed into lower petrol prices, although this may not be felt in the official inflation figures until next month, Mr Page added.
Philip Shaw, Investec's chief economist, said that the coalition's controversial trebling of tuition fees from the autumn would also keep up the inflation pressure.
Minutes of the Bank's latest policy meeting, where it decided to draw a halt to its quantitative easing (QE) programme to stimulate growth, will also be scoured by experts next week, with a split decision anticipated. The Monetary Policy Committee member David Miles is expected to have voted for more money printing, while fellow member Adam Posen has signalled that he is ready to rejoin the QE camp next month after over-estimating the strength of the UK's recovery earlier this year.
Mr Page said the Bank could be keeping back QE as a "shot in the locker" for any intensification of the eurozone crisis, as well as being reluctant to offer more stimulus against a backdrop of rising inflation.
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