ANNUAL UK consumer prices index inflation rose in March for the first time in six months – edging up to 3.5% from 3.4% in February – a development viewed by economists as reducing the scope for further immediate monetary stimulus.
The rise in inflation, reported by the Office for National Statistics yesterday, was bang in line with the consensus City forecast. It reflected partly the fact that food and non-alcoholic beverage prices fell by only 0.5% in March this year, but by a record 1.4% in the same month of 2011 when supermarkets were discounting some products heavily.
There was a greater rise in clothing and footwear prices this March, as sunny weather boosted demand in this category, and computer games proved an upward influence on the annual inflation rate last month.
The Bank of England cut UK base rates to an all-time low of 0.5% in March 2009 and has held them since. It has also put in place a £325 billion quantitative easing programme, aimed at stimulating the economy by boosting money supply through the purchase of Government and corporate bonds using central bank reserves.
The rise in inflation in March was viewed by economists as making it less likely the MPC would feel able to raise the QE programme beyond £325bn at its May meeting. Some economists, however, continue to believe the MPC will eventually have to increase QE further in an attempt to stimulate a struggling UK economy.
And Vicky Redwood, chief UK economist at consultancy Capital Economics, declared the prospects for QE at the MPC's May meeting could change if first-quarter UK gross domestic product data due next Wednesday proved to be weak.
Ms Redwood said of the March inflation data: "These figures could reduce the chances of the MPC announcing extra quantitative easing at May's meet-ing ... However, a weak Q1 GDP figure ... could yet alter the picture."
She added: "Even if the MPC pauses in May, we expect to see more QE announced later this year."
Highlighting a belief that inflation would fall below the Treasury-set target of 2% by the year-end, she added: "The good news is that CPI inflation should start to fall again before long – probably as soon as this month. The 4% fall in oil prices since the end of March should feed through into a drop in petrol prices. And last year's rises in utility prices will fall out of the annual comparison later this year."
Chris Williamson, chief economist at financial information company Markit, said: "The (inflation) rate remains well below the three-year peak of 5.2% seen last September but will worry hawks... at the Bank of England, who are concerned that the Bank's central forecast for inflation to drop below its 2% target by the end of the year is starting to look overly optimistic.
"Such persistent above-target inflation threatens widely-held hopes that a reduction in upward price pressures will provide an important stimulus to the economy this year. The increase in inflation reduces the scope for the Bank of England to ramp up its asset purchase programme, leading to an increasingly fragile-looking recovery."
Why are you making commenting on The Herald only available to subscribers?
It should have been a safe space for informed debate, somewhere for readers to discuss issues around the biggest stories of the day, but all too often the below the line comments on most websites have become bogged down by off-topic discussions and abuse.
heraldscotland.com is tackling this problem by allowing only subscribers to comment.
We are doing this to improve the experience for our loyal readers and we believe it will reduce the ability of trolls and troublemakers, who occasionally find their way onto our site, to abuse our journalists and readers. We also hope it will help the comments section fulfil its promise as a part of Scotland's conversation with itself.
We are lucky at The Herald. We are read by an informed, educated readership who can add their knowledge and insights to our stories.
That is invaluable.
We are making the subscriber-only change to support our valued readers, who tell us they don't want the site cluttered up with irrelevant comments, untruths and abuse.
In the past, the journalist’s job was to collect and distribute information to the audience. Technology means that readers can shape a discussion. We look forward to hearing from you on heraldscotland.com
Comments & Moderation
Readers’ comments: You are personally liable for the content of any comments you upload to this website, so please act responsibly. We do not pre-moderate or monitor readers’ comments appearing on our websites, but we do post-moderate in response to complaints we receive or otherwise when a potential problem comes to our attention. You can make a complaint by using the ‘report this post’ link . We may then apply our discretion under the user terms to amend or delete comments.
Post moderation is undertaken full-time 9am-6pm on weekdays, and on a part-time basis outwith those hours.
Read the rules hereComments are closed on this article