King May Send Third U.K. Inflation Letter of 2010 as Rate Keeps Above 3%
BOE Governor Mervyn King
Simon Dawson/Bloomberg
BOE Governor Mervyn King predicted last week that inflation will slow below the 2 percent target next year as the government’s budget squeeze constrains growth.
BOE Governor Mervyn King predicted last week that inflation will slow below the 2 percent target next year as the government’s budget squeeze constrains growth. Photographer: Simon Dawson/Bloomberg
Aug. 17 (Bloomberg) -- Julian Callow, chief European economist at Barclays Capital, talks about U.K. inflation. Consumer prices rose 3.1 percent from a year earlier, forcing Bank of England Governor Mervyn King to write his third public letter this year to explain how he will bring prices under control. Callow speaks with Andrea Catherwood on Bloomberg Television's "The Pulse." (Source: Bloomberg)
Bank of England Governor Mervyn King said inflation is likely to exceed the U.K. government’s upper 3 percent limit in coming months as higher sales taxes drive gains in consumer prices.
King was today forced to write a third public letter this year after the Office for National Statistics said prices rose 3.1 percent in July from a year earlier after climbing 3.2 percent in June. Under U.K. law, King must write to the Treasury every three months when inflation exceeds 3 percent. He already sent explanations in February and May.
“There remains a significant probability that I will need to write further open letters to you in the coming months,” King told Chancellor of the Exchequer George Osborne. King also reiterated his view that inflation will probably slow “close to, or a little below” the 2 percent target in the medium term.
Today’s reading may harden a divide on the Monetary Policy Committee, where policy maker Andrew Sentance has argued for an interest-rate increase to tame consumer prices while other officials have warned more stimulus may be needed. King said that policy makers “stand ready to expand or to reduce the extent of monetary stimulus” as needed, prompting Osborne to reply that he welcomes the bank’s “flexibility.”
“There are a few things that have been out of their hands that have caused inflation to surprise on the upside,” George Buckley, chief U.K. economist at Deutsche Bank AG in London, said in a telephone interview. “The Bank of England is still credible. It will keep inflation at target over the long run. The bigger question is what combination of interest rates and policy that means.”
Footwear
The pound was little changed after the inflation report, trading at $1.5659 as of 10:59 a.m. in London. The yield on the benchmark two-year government bond rose 3 basis points to 0.673 percentage point.
Inflation slowed because of lower costs of transport, clothing and footwear, and miscellaneous items such as financial services, the statistics office said. The rate stayed higher because transport and food costs remained more elevated than a year earlier.
Newcastle, England-based Greggs Plc, the U.K.’s biggest baker, said Aug. 10 the higher price of wheat has pushed up ingredient costs, though it isn’t planning to increase the prices of its products yet. First-half profit rose 13 percent as it offered meal deals to attract customers who had less disposable income than a year ago.
Core inflation, which excludes the cost of food, tobacco, alcohol and energy prices, slowed to 2.6 percent from 3.1 percent in June. Economists forecast a reading of 3 percent, according to the median of 9 predictions in a Bloomberg survey.
Inflation Deviation
The inflation rate has held above the government ceiling since March as the weaker pound and higher commodity costs feed price pressures in the economy. Sterling has fallen by about a quarter on a trade-weighted basis since the start of 2007 while oil prices have more than doubled in the last 18 months. Wheat prices have surged 44 percent in the past year.
The bank’s inflation projections show the rate will be higher next year than it had previously forecast. Osborne will raise sales tax to 20 percent in January from the current 17.5 percent. The higher levy will accompany the biggest round of budget cuts since World War II to tackle a record deficit. The bank predicts inflation will then slow below 1.5 percent.
Policy makers held the key interest rate at a record low of 0.5 percent this month and their bond-purchase plan at 200 billion pounds ($313 billion). The bank will publish minutes of the decision tomorrow. Sentance argued in June and July that the benchmark interest rate should be raised to control inflation.
King said last week the overall outlook for the economy is weaker than in May, and “if it is necessary to respond, then we are quite prepared to do that.”
Retail price inflation, a measure of the cost of living used in wage negotiations, slowed to 4.8 percent from 5 percent in June. The result was exactly the same for the rate excluding mortgage-interest payments.
To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net
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