Stubborn inflation hits hopes of more QE

CPI falls less than expected, undermining prospects for a new burst of quantitative easing
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The Independent Online

Official inflation figures yesterday thwarted hopes of a rapid end to the squeeze on incomes and lowered expectations of the Bank of England's Monetary Policy Committee (MPC) extending its programme of quantitative easing (QE) next month.

The latest report from the Office for National Statistics (ONS) showed that consumer price index (CPI) year-on-year inflation fell to 3.4 per cent in February, down from 3.6 per cent in the preceding month. Financial analysts had expected a fall to 3.3 per cent. Retail price index inflation, which includes mortgage interest payments, dropped to 3.7 per cent from 3.9 per cent.

"If inflation fails to fall as quickly as the MPC would like to see, then the Bank of England may well opt to keep policy on hold at the next meeting" said George Buckley of Deutsche Bank.

The MPC justified the £50bn extension of its asset purchase scheme in February on the grounds that inflation would probably come in below the Bank's official 2 per cent target by the end of the year. Signs of stickiness in prices will strengthen the hand of hawks on the MPC.

The Bank's chief economist, Spencer Dale, who is also a member of the MPC, said in a speech in Cardiff yesterday that he personally suspects inflation will turn out higher than the consensus view of the MPC.

He said: "My own view is that the chance of inflation being above or below 2 per cent by the end of this year and into 2013 is somewhat more balanced".

Mr Dale cited the dangers that tensions in the Middle East could push up global energy prices and also disappointing UK productivity growth.

The ONS data showed that CPI was driven lower in February mainly by falls in energy bills and the fading impact of last year's increase in VAT. Discounting on digital cameras and air fares also pushed retail prices down. Inflation is now at its lowest rate since November 2010. But rises in alcohol prices prevented CPI falling lower. Spirits prices rose by 2.6 over the year.

A CBI survey of 436 manufacturers yesterday also pointed to inflationary pressures, with a considerable number saying they expect to raise their prices over the coming quarter.

Ian McCafferty, the CBI's chief economic adviser, attributed this to the recent rise in oil prices. However, more encouragingly, 39 per cent of respondents said they expected output to rise in the next three months, while 15 per cent said it would fall. The positive balance of 24 per cent is the strongest in a year.

The latest inflation figures mean the cost of living remains double the growth in average earnings, which rose by 1.4 per cent in the three months to January, according to the ONS. The Bank of England and the Treasury's fiscal watchdog, the Office for Budget Responsibility, have both based their forecasts for a pick up in growth later this year on expectations that the public's real incomes will rise as prices fall back.

The MPC voted to keep its QE programme on hold earlier this month. The minutes of the meeting, which will be released today, will show whether any members voted for an increase in asset purchases.