Government figures released today show rising food and energy prices have pushed UK consumer inflation to its fastest rate since the measure began in 1997. The Consumer Prices Index (CPI) measure of annual inflation was 3.3% in May, up from 3% the previous month, said the Office for National Statistics (ONS).
It will trigger for only the second time since the BoE was given independence the occasion when its governor is obliged to write an open letter to the Chancellor of the Exchequer about why inflation has drifted so far from the two per cent target. The previous occasion saw Mervyn King writing to the chancellor when inflation hit 3.1% in April 2007.
Trevor Williams, (pictured), chief economist at Lloyds TSB Corporate Markets, sits on the shadow Monetary Policy Committee, run by the Institute of Economic Affairs. With last month’s inflation figures rising, including food inflation at seven per cent and petrol by a whopping 20 per cent over the past year, and the latest announcement looking evermore challenging, what are the prospects for more correspondence winging its way between Threadneedle Street and Whitehall?  

“I’m afraid there’s worse to come in the months ahead; I do think it could possibly go to just beyond four per cent by September time and hover there till early 2009.”

Asked if he thought there was a danger that these kind of inflation rates will become built into expectations going forward – and built into to wages – whereby three per cent becomes something of a norm, making it very hard to get back down to anywhere near two again, Williams said that “…it absolutely does. And this is why the bank has to be very concerned, because as the recent national opinion poll survey showed, consumer inflation expectation had hit four-point-three per cent – a record high since that particular survey began in nineteen-ninety-nine.”