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UPDATE 3-UK inflation uptick creates snag for policymakers
April 17, 2012 / 9:26 AM / in 6 years

UPDATE 3-UK inflation uptick creates snag for policymakers

* First rise in annual CPI since Sept peak

* BoE less likely to extend QE after CPI rise

* IMF says Bank of England can ease policy further

* Core inflation up, drought risk to food prices

* Adds to Osborne’s woes

By Sven Egenter and Fiona Shaikh

LONDON, April 17 (Reuters) - British inflation rose in March for the first time in six months, blunting the Bank of England’s appetite for injecting more cash into the struggling economy and piling further pressure on the government after a heavily criticised budget.

The central bank and the government had been hoping that falling price pressures would ease the squeeze on Britons’ finances and boost consumer spending, but the renewed rise in inflation could threaten the fragile economic recovery.

The International Monetary Fund (IMF) raised its 2012 growth forecast for Britain slightly to 0.8 percent on Tuesday and said the Bank of England had the room for further easing, despite concerns among more hawkish policymakers that this would make it even harder to get inflation back to the 2 percent target.

The $2.5 trillion economy has not yet recovered from the 2007-2009 crisis, which left millions of Britons poorer as inflation outpaced meagre wage rises and put pressure on the government to soften its drive to erase the huge budget deficit.

Tuesday’s setback on inflation follows weeks of attacks on finance minister George Osborne’s 2012 budget plans, which opponents said favoured the rich, removed tax breaks for the elderly and raised taxes on hot snacks.

The Office for National Statistics said the cost of food, clothing and recreation pushed consumer price inflation up to 3.5 percent in March from 3.4 percent in February, halting a five-month decline from a peak of 5.2 percent in September 2011.

An uptick in core inflation - which strips out the volatile food, energy, tobacco and alcohol components - will concern central bankers who are keen to support the economy but are also starting to worry that price pressures are not easing as fast as they had hoped.

Policymaker Adam Posen, who has been advocating more stimulus, said at a conference that one month’s data wouldn’t change the bank’s view.

However, he added: “If the core inflation rate doesn’t come down on a sustained basis, then we have got to rethink.”


The BoE’s quarterly forecasts in February showed it expected inflation to fall below its 2 percent target towards the end of this year and remain below the goal over the coming 2 years.

But the figures will make more hawkish policymakers, such as chief economist Spencer Dale and external member Martin Weale, even more reluctant to back another round of asset-buying when the current 325 billion pound quantitative-easing programme is complete in May.

“In the context of the Bank of England, we are not growing and certainly not growing fast enough, and that argues for more QE,” said Scotiabank economist Alan Clarke. “But uncomfortably high inflation is a significant obstruction. So it is not going to be an easy decision for the Bank of England in May.”

Most economists don’t expect the central bank to extend its programme of buying British government bonds, though a strong minority is still betting on more easing as the economy struggles and unemployment is at its highest level since the mid-1990s.

In its World Economic Outlook, the IMF said slipping commodity prices and the overall fall in inflation left room for more easing. As in other countries with interest rates close to zero, the BoE could step up unconventional policies preferably in a way that eased credit conditions for small and medium-size firms and households, the IMF said.

Bank of England Governor Mervyn King has repeatedly rejected widespread calls to buy assets other than gilts to help smaller companies more directly. The government, in turn, has launched a credit easing plan to lower the borrowing costs for the sector.


Britain’s economy shrank at the end of last year and while business surveys indicated a firmer start to 2012, a drop in manufacturing and weak construction output has raised fears that the economy has fallen back into recession.

The government said in a statement that most market commentators expected inflation to fall further, which should provide relief for family budgets.

The opposition Labour Party called for a reversal of the government’s 2011 increase in value-added tax to help consumers.

The ONS said the biggest upward drivers of inflation were food and clothing prices. Food prices fell less on the month in March than they did a year ago, driving up the annual rate to 4.6 percent, which was the highest since October 2011.

Prices of clothes and shoes were 3.2 percent higher than last March, the biggest year-on-year rise since last October and a full percentage point above February’s figure.

More worryingly for the BoE, core consumer price inflation ticked up a notch to 2.5 percent. Retail price inflation, which is often used as a benchmark for pay deals, inched lower, however, to 3.6 percent, its lowest since December 2009.

A drought across most of England risks pushing up fresh food prices even further, while petrol prices remain near a record high. Factory gate inflation had also been higher than expected in March, though firms’ raw material costs rose at their weakest pace in more than two years.

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