October jump in inflation is first of many
INFLATION accelerated in October for the first time in eight months as economists warned that last month’s bounce might spell the beginning of several months of increases.
Official data from the Office for National Statistics (ONS) showed yesterday that the consumer prices index (CPI) rose to an annual rate of 1.5 per cent in October, while the retail prices index – on which many wage settlements are based – fell at a slower rate of 0.8 per cent.
The recent fall in food prices also finished in October, while higher second-hand car prices also had a significant upward impact on inflation.
The bounce in the CPI was due mainly to the sharp fall in energy prices a year ago, and this effect is expected to continue feeding through into the price figures over the coming months.
But the Bank of England, which targets inflation at two per cent over the two-year horizon, said at its Inflation Report conference held last week that it would look through the short-term rise in the price level, which may necessitate its governor Mervyn King to write a letter of explanation to the chancellor.
The Bank forecasts CPI inflation to fall back below target for most of next year, but Henderson’s chief economist Simon Ward is more sceptical.
He expects the October rise to mark “the start of a trend that is likely to carry the headline rate above three per cent in January. Inflation should subside over the remainder of 2010 but is unlikely to fall below the two per cent target”.
This month’s spike in inflation marks the eighth time the CPI has overshot the consensus forecast, which may over time erode the credibility of the Monetary Policy Committee’s (MPC) forecasts, says Citi’s Michael Saunders.
Inflation expectations may also appear less well anchored if inflation rises sharply above target.