By Max Clarke
Tuesday’s revelation that the Consumer Prices Index of inflation jumped a full 0.5%, hitting a 2 ½ year high of 4.5% has been met with mixed reactions.
Speculation that the Bank of England’s Monetary Policy Committee will soon be pressured to raise interest rates from their record 0.5% low have been renewed, while others say such a reaction is unlikely as the Committee will likely ignore temporary inflation spikes driven by short term gains in costs of certain sectors, notably travel.
Commenting on this morning’s rise are business organisation leaders and economists.
David Kern, Chief Economist at the British Chambers of Commerce (BCC), said:
“After last month’s surprise fall, the latest figures show inflation has risen to 4.5%, the highest level since October 2008. While these figures are disappointing, it is not entirely unexpected. Mervyn King, in the Bank of England’s latest inflation report, anticipated that inflation may rise to 5% this year, before starting to fall. Although the CPI figures are disappointing, there is some good news from the Retail Prices Index, which has eased marginally.
“The current inflationary pressures largely originate in sharp increases in energy and commodity prices, and in some part from the Budget measures introduced last month. However, there is hope that the recent fall in oil, gas and other commodity prices will be reflected in lower domestic inflation later in the year.
“Higher inflation figures will increase calls for a rise in interest rates. However, the MPC must proceed with great caution and avoid any actions that may threaten what is still a fragile recovery. The government’s tough austerity measures are putting considerable pressure on businesses and individuals, and a premature interest rate increase could derail the recovery. We expect to see interest rates increase later in the year, but we urge the MPC to hold its nerve in the short term to allow the economy to grow while absorbing the initial impacts of the measures to tackle the UK’s deficit.”
Chris Towner, director of FX Advisory Services at HiFX said:
“Inflation today in the UK pushed higher to 4.5%, reigniting talk, yet again, of interest rate hikes. This comes amid reluctance from the Bank of England (BoE) MPC members to raise rates given the fragility of the UK economy. However, in the last quarterly inflation report, Mervyn King sounded a slightly more hawkish tone, in an attempt to manage expectations, warning that the UK consumer should expect an interest rate hike at some stage.
How much longer the BoE MPC will be able to protect the consumer given that inflation is running at more than double their target rate is basically down to the GDP data over the next few months. The good news here for the consumer is the enormous debate going on around whether to raise rates by 25bps from these extraordinary low levels, this would mean that the UK is going to be protected from a return to normalisation of interest rates for some years to come.”
Jeremy Cook, Chief Economist At World First said:
“While an increase has obviously been seen in fuel and energy prices, we are also seeing a jump in the core consumer price measure (to its highest level since 1997) which discounts these factors away.
“Big increases were seen in alcohol and tobacco (8.9%) and transport (20.5%) in the month of April.
“This solidifies the Bank of England’s view in last week’s quarterly inflation report that suggested that CPI will likely hit 5% soon and leads us to believe that a rate rise in August is now more likely than ever.
“We expect tomorrow’s minutes from the Bank of England meeting will show the 5 members of the MPC who are still sitting on the fence will now start leaning towards hikes…”