Britain’s inflation problem is only going to get worse

15th December 2010

The latest figures from the Bank of England show that Consumer Price Index (CPI) inflation rose to an annual 3.3% in November and Simon Ward, chief economist with Henderson Global Investors says all the signs are that we will see CPI inflation hit 4% “in early 2011”.

And other economists are in agreement with his forecast of further consumer pain to come. Andrew Goodwin from the Ernst & Young Item Club says: “We expect CPI inflation to drop back below 2% from early-2012.” At least another year from now.

Soaring commodity prices, the imminent VAT hike and Ward says, “a stubborn “core” trend, which continues to defy Bank of England predictions of a slowdown in response to economic slack and fading exchange rate effects” make for a sure-fire inflation-boosting combination.  And if you think food prices have already rocketed, then prepare for more bad news. Ward predicts that food inflation is likely to hit a whopping 7% very soon. And that was another prediction he made back in September. 

Ward says: “The November rise was driven by a pick-up in goods inflation from 2.6% to 2.9% as the food, alcohol and tobacco component moved up from 5.0% to 5.8% and non-energy industrial goods inflation firmed from 1.1% to 1.4%, mainly as a result of price hikes for clothing and household goods.“High inflation threatens to slow the economic recovery by squeezing real incomes and money balances.

“By refusing to raise interest rates because of coming fiscal tightening, the Bank is encouraging high pass-through of cost-push pressures and a rise in inflationary expectations, thereby entrenching the current overshoot.

“Far from supporting the economy, its actions risk damaging medium-term growth prospects.”

On the community boards concern is rightly growing among consumers and investors who fear even worse is to come.

Ektope, Cyprus commenting on says: “The BOE seem to be clueless. It didn't take a genius to work out that inflation would be above target. It will reach 5% by this time next year unless the BOE take some form of action.”

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