U.K. Inflation Probably Slowed as BOE’s King Prepares to Lower Forecasts

U.K. inflation probably eased from a three-year high in October and may slow further as Europe’s debt crisis depresses the economic outlook.

Inflation slowed to 5.1 percent from 5.2 percent in September, according to the median estimate of 33 economists in a Bloomberg News survey. Because the rate exceeds the government’s 3 percent upper limit, Bank of England Governor Mervyn King will be required to write a letter of explanation to Chancellor of the Exchequer George Osborne.

The Bank of England is in the second of a four-month program of bond purchases aimed at supporting the recovery. With the economy under pressure from the government’s budget squeeze and Europe’s sovereign debt turmoil, King will face questions at a press conference tomorrow on the central bank’s use of so- called quantitative easing to prevent another recession.

“With the economic slowdown, the pressure on inflation should be downwards,” said Amit Kara, an economist at UBS AG in London and a former Bank of England official. “They’ll leave the door open for more QE for sure.”

The Office for National Statistics in London will publish the inflation data at 9:30 a.m. and the Bank of England will publish any letter, along with the chancellor’s response, an hour later.

Pound Rises

The pound rose 0.3 percent against the euro to 85.48 pence at 8:14 a.m. in London today and was little changed against the U.S. dollar at $1.5916.

King is due to go to Buckingham Palace today to receive his knighthood from Queen Elizabeth II at a ceremony starting at 11 a.m. King was awarded the title in June in the queen’s birthday honors list.

The Bank of England left the target for asset purchases at 275 billion pounds ($438 billion) this month after increasing it by 75 billion pounds in October. It also kept its benchmark interest rate at a record low of 0.5 percent.

Since the expansion of stimulus, surveys showed U.K. manufacturing output shrank in October and services growth cooled. At the same time, the euro-area turmoil has escalated, pushing Italian bond yields to a record amid investor concern that the region’s third-largest economy will struggle to shoulder its debt burden.

Output Gap

In a report today, the Centre for Economic Performance at the London School of Economics said Britain’s output gap means there is room for the government to slow the pace of the fiscal squeeze by temporary cuts to sales tax and National Insurance contributions, and by boosting investment in schools and roads.

King will speak in London tomorrow after the central bank publishes its quarterly Inflation Report and new economic projections. The bank’s August forecasts showed consumer-price gains slowing below its 2 percent target by the first quarter of 2013.

“The updated inflation projections are going to be weak, and it seems likely that they’re going to put through a pretty substantial downgrade to their GDP forecast,” Simon Hayes, an economist at Barclays Capital in London, said on a conference call yesterday. “I’m pretty confident QE will be increased further.”

Inflation has exceeded the bank’s 2 percent goal for 22 months as surging commodity prices, a weaker pound and the government’s sales-tax increase in January stoked price gains. King has argued that these factors are temporary and inflation will ease “sharply” next year.

Today’s data may also show core annual inflation, a measure that excludes alcohol, tobacco and energy prices, slowed to 3.2 percent from 3.3 percent, according to separate Bloomberg surveys. Gains in the retail-price index, a measure used in wage negotiations, probably slowed to 5.5 percent from 5.6 percent.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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