Higher prices for food and commodities like oil and the recent fall in the value of sterling will push up the UK inflation rate beyond 3% and force Bank of England Governor Mervyn King to write an explanatory letter to the Chancellor, Charles Bean, the Bank's executive director and chief economist, warned last night.
Speaking in London, Bean said growing inflationary pressures have been working their way along the supply chain.
"Manufacturers' input price inflation in the year to March exceeds 20%, the highest since 1986," he stated. "And output price inflation is running at 6%, its highest since 1990.
"Consumer price inflation, having risen above 3% briefly last year and subsequently fallen back, has picked up again on the back of higher domestic energy and food prices, reaching 2.5% in March The continuing influences of higher energy and food prices as well as the impact of the recent depreciation of sterling on import costs, mean that inflation is likely to exceed 3% again during the second half of the year, triggering an open letter from the Governor to the Chancellor."
King was forced to write such a letter to then Chancellor Gordon Brown, explaining why inflation had risen above 3%. It is unlikely that he would relish the prospect to having to write another one to Brown's successor, Alistair Darling.
Bean told his audience at the Ismaili Centre that members of the Bank's rate-setting panel, the Monetary Policy Committee, are "walking a tightrope" because they have to be vigilant on the inflation front, while at the same time dealing with the impact on the wider economy of the credit crisis that was created by the US sub-prime mortgage debacle.
He delivered a generally downbeat message, saying the situation had deteriorated since the Bank last produced projections for economic growth and inflation.
"Since then, the dislocation in the credit markets has worsened, but pricing pressures have also intensified."
Bean said the Bank expects to be able to publish new projections in its May inflation report.
He said the crisis in the credit markets has been deeper and has lasted longer than economists and central bankers had expected, but he emphasised that the Bank of England is working with all concerned parties to reduce the impact of the present turmoil.
He went on to say that banks, which have adopted a more rigorous attitute towards lending in the wake of tighter markets, will remain cautious. That means potential borowers will continue to have difficulty in obtaining mortgages.
