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Prices up, growth down says Bank of England.

London, UK (11/05/2011)

Inflation will hit 5% by the end of the year, says the BoE's latest report, while growth will shrivel to 2.7%. Happy Wednesday...

The Bank of England has published its quarterly inflation report and it’s not good news. Mervyn King and his band of no-so-merry men have raised their prediction for inflation rates, from 4.5% to 5% by the end of the year.

Perhaps even more significantly, expectations for growth - already pretty anaemic at 2.9% - are now down to only 2.7% across the whole of 2011. And the 3.2% growth ‘recovery’ which had been predicted for 2012 has now dropped back to only 2.8% - barely any better than this year’s forecast. That’s starting to look dangerously like stagflation, not that you’ll catch anyone on the Bank’s staff uttering the dreaded ‘s’ word.

King, the Bank’s careworn governor, says that higher utility bills during the winter are to blame for the rise in inflation. According to the report, the bank expects gas prices to rise by 15% and electricity 10% as the weather turns colder later this year.

Inflation has been on a bumpy path this year so far. The figure for March was 4% - an unexpected fall from February’s 4.4% after several months of rising prices. Lower food prices were the main reason behind the cheer; and record falls in the cost of fruit, bread and cereal particularly helped.  April’s inflation figures haven’t been released yet, but given this report another fall would seem to be, er, unexpected. Despite this, King said that the overall picture won’t change for inflation, as the bank still predicts it will halve next year to 2.4%. That’s a figure not seen since June 2007. 

The UK will now have its eye on interest rates. Only last week the central bank kept rates at its record low of 0.5% as it chose to focus on supporting the UK’s economic growth rather than fighting inflation.  But the pressure on the bank to raise interest rates is growing – especially in light of the latest inflation forecasts that CPI could rise to 5% by the end of the year.

 
Some analysts have predicted that interest rates will rise – albeit very slightly – in the back end of the year, but the jury - or rather the MPC - is still out on this one. Those weedy growth forecasts - these are BoE numbers remember, with a historic tradition of looking very much on the bright side - are arguably a greater incentive to keep rates low than the prospect of rising inflation is to put them up. Either way, this recovery is looking like a (very slow) marathon rather than a sprint.

For more information please click the following link: http://www.managementtoday.co.uk/bulletin/mtdailybulletin/article/1069511/prices-up-growth-down-says-bank-england/



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