Inflation climbs to 3.5% amid doubts over future QE stimulus

Group Business Editor

Wednesday 18 April 2012

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.

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Ian McConnell

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."

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Inflation climbs to 3.5% amid doubts over future QE stimulus

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