Inflation spike provides fuel for critics of King

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The Independent Online

The governor of the Bank of England, Mervyn King, will face criticism this week as inflation figures out tomorrow are expected to show the annual rate rising to between 4 and 4.5 per cent, putting more pressure on household budgets and savings.

The figure will be more than double the Bank's target of 2 per cent, and a sharp rise on the 3.7 per cent rate seen in December. It has been above the 2 per cent mark for 47 of the past 60 months. The Governor will have to write a further open letter of explanation to the Chancellor for missing the target.

Critics have already described the Bank's failure to curtail inflation as "a joke" and there is a growing suspicion the Bank has shelved the target. While Mr King retains the confidence of the Government, David Cameron has also voiced concerns. The Prime Minister said last month: "If you look at the recent [inflation] figures, they are concerning because they are well outside what the Bank of England is meant to deliver. Inflation is extremely harmful, it destroys people's savings. We don't want to go back to having an inflation problem as we had in the past."

On Wednesday, the Bank will be forced to revise its forecast for inflation up yet again, and the Governor and senior colleagues will face the media to defend their record. Yet at last week's meeting of the Bank's Monetary Policy Committee (MPC), the lending base rate was kept at its 315-year low of 0.5 per cent – although the balance of opinion towards raising rates has strengthened in recent months.

The increase in VAT to 20 per cent, soaring world commodity prices, and the depreciation of sterling since 2008 are all factors behind the rise in prices. The Governor has said he believes the current inflation spike will be over late in 2012. Before that, the Consumer Price Index will rise to between 4 and 5 per cent this year, he has said. Most economists believe the peak will come in the February figures, published in March.

On the older Retail Price Index measure, inflation could approach 6 per cent. This is the figure still widely used in pay negotiations but there is as yet little evidence of spiralling labour costs. The absence of domestically generated inflation, the Bank says, is reason enough to discount the imported inflation that has made food and energy expensive in recent months.

The pattern of price rises does seem to be affecting poorer and pensioner households more harshly than the more prosperous, as so many of the price rises are on basic essentials – food, gas and electricity bills and public transport. When the Bank does raise interest rates – and the assumption in the City is that they will be at 1 per cent or so by this time next year – it will hit many mortgage holders hard. An increase to 0.75 per cent would add about £40 a month to the average mortgage bill. It might also have a devastating impact on an already fragile housing market.

In his Budget on 23 March, George Osborne will have to signal formally a willingness to extend the Bank's option of "quantitative easing" programme. While in opposition, Mr Cameron warned of its inflationary consequences.

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