U.K. inflation probably accelerated to the fastest pace in seven months in December, moving further above the government’s limit and increasing pressure on the Bank of England to raise its key interest rate.
Consumer-price growth accelerated to 3.4 percent, the most since May, according to the median forecast of 31 economists in a Bloomberg News survey. That would be the 10th month inflation exceeded the 3 percent limit. The Office for National Statistics will release the data at 9:30 a.m. today in London.
Bank of England Governor Mervyn King was forced to write four letters to the government last year explaining the level of inflation. The bank sees price growth exceeding its 2 percent target this year, and Conservative lawmaker Michael Fallon, who serves on the U.K. Treasury Committee, said on Jan. 16 policy makers should start to raise the interest rate gradually now.
“You probably will get more noise out of politicians on this,” said Philip Rush, an economist at Nomura International Plc in London. “There is a credibility issue but we’re expecting the bank to sit on its hands for a little while.”
The pound rose against the dollar before today’s report, and was up almost 0.5 percent at $1.5960 as of 7:41 a.m. in London. The yield on the benchmark two-year government bond rose 2 basis points to 1.35 percent.
Nomura’s Rush sees inflation peaking at 4 percent in February after the government increased the sales-tax rate this month, and forecasts the bank will increase the benchmark rate by 25 basis points in August, and once more before the end of the year.
Prime Minister David Cameron said this month the recent gain in consumer prices was “concerning” and that policy makers faced a “difficult task.” The Monetary Policy Committee has split three ways in recent months on whether to raise the rate to combat inflation or increase stimulus to support growth. It kept its 200 billion-pound ($318 billion) bond plan unchanged and the benchmark rate at a record low 0.5 percent last week.
“They will have to work out whether, given they’re going to go up anyway, whether it’d be better now to start raising gradually, or whether they’re prepared to face a very sudden increase much later in the year,” Fallon told BBC Radio 5. “I tend to be a ‘now man’ because we’ve had constant reassurances that inflation will fall and it hasn’t fallen.”
Data last week pointed to mounting price pressure building. Input-price inflation accelerated to 12.5 percent in December from 9.2 percent in November on higher costs for food and fuel. Inflation concerns prompted economists at BNP Paribas SA, Citigroup and Societe Generale SA to say this month the bank will raise interest rates faster than previously thought.
Nevertheless, the government’s spending cuts may restrain the economic recovery and curb price pressures. Ernst & Young LLP’s Item Club said yesterday that the Bank of England must “hold its nerve” and not raise the key rate until the recovery shows signs of overcoming the budget squeeze.
The National Institute of Economic and Social Research, whose clients include the Bank of England, said last week that gross domestic product increased 0.5 percent in the fourth quarter, less than the 0.6 percent in the three months through November.
“Growth all hinges on some major ‘ifs’ and ‘buts,’” Item Club chief economic adviser Peter Spencer said. The “most significant” this year is “whether the MPC maintains the base rate at 0.5 percent.”