‘Shock’ rise in inflation pushes UK closer to 4%

16th November 2010

Simon Ward, chief economist at Henderson Global Investors says that all the signs are that the UK will see consumer prices index (CPI) inflation hit 4% in early 2011.

Today's official figures show that CPI inflation rose unexpectedly to 3.2% in October, on the back of higher fuel prices.

While analysts had expected the CPI figure to remain unchanged at 3.1%, according to the BBC, UK inflation rose unexpectedly to 3.2%,.

At the start of this month Ward forecast an increase of between 3.3% and 3.4%, as we first revealed on MIndful Money.  

He said that with the VAT hike to 20% set to kick-in at the start of the new year, a likely surge in utility prices across the board, increasingly higher petrol and diesel prices and the knock-on effect of commodity prices which is expected to see CPI food inflation rise, inflation is set to hit 4% in early 2011.

Ward says: "With little news in today's report, CPI inflation still appears likely to rise to about 4% by early 2011, reflecting high VAT pass-through, food and energy cost increases and stable "core" pressures.

"The extent, moreover, to which such "shocks" pass through to inflation, instead of being absorbed by a reduction in profit margins or nominal wages, depends on the stance of monetary policy and its impact on inflationary expectations.

"A high degree of pass-through is evidence that monetary conditions are too loose and the inflation target is failing to anchor expectations, with firms confident that price hikes will not cause them to lose market share because the MPC will allow a general rise in inflation." 

According to the official briefing from the Office for National Statistics, higher fuel prices made a large contribution to the figure for October.

Prior to today's announcement, official forecasts were for CPI inflation to rise to about 3.5% in the first quarter of 2011 compared with a forecast of 3.0% in the August Report.

SEE ALSO: BoE warned: monetary conditions 'too loose'

                    UK inflation edging ever closer to 4%

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