Sharp rise in inflation leaves Clarke off course
Friday 15 November 1996
The underlying rate of inflation, which is the most closely monitored measure and excludes mortgage interest costs, rose from an annual rate of 2.9 per cent in September to 3.3 per cent last month, compared with the market forecast of 3.1 per cent. The Treasury's stated aim remains to bring the underlying rate to 2.5 per cent or below by the next election. One economist, Adam Cole from HSBC James Capel , described the figures as "very disappointing indeed" and worse, on an underlying basis, than any other European Union country apart from Greece.
He added: "The Chancellor's target of 2.5 per cent now looks virtually unachievable. I just don't see how he can hit it."
Eddie George, the Government of the Bank of England, has repeatedly said he believes further increases in interest rates will be necessary to curb inflation on top of the recent 0.25 per cent increase. Economists said the pressure on Kenneth Clarke, the Chancellor, to raise rates before the general election would become intense.
Expectations in the markets of a rise in rates pushed the pound higher on the foreign exchanges. Sterling rose by almost a cent to $1.66 and jumped two pfennigs to DM2.51. Other inflation measures also rose by more than predicted. The headline rate surged from 2.1 per cent in the year to September to 2.7 per cent in October, while the Bank of England's preferred figure, which strips out both mortgage payments and indirect taxes, jumped from 2.5 per cent to 3 per cent.
The figures provide fresh evidence that the economic recovery is having a clear impact on prices. Though manufacturers' wholesale prices remain depressed, the data suggests retailers are using improving consumer confidence to boost their profit margins. Motoring costs went up by 6.4 per cent compared with the previous year.
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