New Bank of England chief Mark Carney to face rising costs

Incoming Governor faces letter to Chancellor to explain inflation hike

The Bank of England's new Governor, Mark Carney, may be forced to explain high inflation to the Chancellor just days after starting his new job, experts have warned.

The Bank's Consumer Prices Index benchmark – currently 2.7 per cent – is at risk of climbing above 3 per cent in the summer due to the rising costs of essentials like food, gas and electricity squeezing consumers. The Governor has to write an open letter to George Osborne when CPI moves away from its 2 per cent target by more than 1 per cent in either direction.

Sir Mervyn King, the current Governor, has written 14 times to the Chancellor to explain surging living costs since 2007, although he managed to avoid the embarrassment during the first four years of his leadership in an unprecedented period of inflation stability.

Mr Carney may be less fortunate when he takes up the reins at Threadneedle Street in July, according to Capital Economics chief UK economist Vicky Redwood. She said: "We see inflation edging above 3 per cent in June or July before falling back again. Carney having to write to the Chancellor straightaway is a possibility."

Consensus forecasts put December's CPI – due from the Office for National Statistics this week – unchanged at 2.7 per cent, although many City economists are braced for a figure as high as 2.9 per cent.

Investec chief economist Philip Shaw said the bulk of the gas and electricity prices coming through over the over the month would add 0.3 per cent to the index, only partially offset by falling petrol prices.

He added: "Clothing and footwear prices typically fall in December, capturing the early turn-of-the-year sales. But the decline a year ago was an unusually large 2.8 per cent which looks unlikely to be matched this time, adding a little to inflation pressures."

Food price rises are due to kick in this year, as Waitrose chief Mark Price warned last week, but should actually bring down inflation in December, due to even bigger rises a year earlier.

On Friday, the National Institute of Economic and Social Research said that the economy had contracted by 0.3 per cent to add to concerns over the UK's financial health.

This is significant because should official data back up these figures, the economy will only have returned to growth for one quarter – July to September – after a nasty slump. It would also mean that the UK economy was flat in 2012, heaping pressure on the Government to come up with new ideas to get the country out of the economic mire.

The Coalition has repeatedly said that there is no plan B alternative to its economic austerity plans.

Comments