‘INFLATION is likely to rise further in the near future,’ Bank of England Governor Sir Mervyn King warned yesterday, describing it as ‘stubbornly above the 2% target’.
He blamed inflation on ‘external pressures’ and acknowledged that he had no idea how high it will go, admitting, ‘it is actually impossible for us to predict it’.
Presenting his penultimate Bank of England Quarterly Inflation Report, King bemoaned the fact that ‘growth is sluggish’.
The inflation rate, currently officially at 2.7%, will rise to at least 3% by the summer, said King, and remain above the 2% target for at least two years.
He was speaking about the CPI rate. In fact the RPI rate, which includes housing costs, has already reached 3.3%.
In a reversal of his last report in November, when he said that inflation would fall back towards its 2% target in the second half of this year, King admitted: ‘The outlook for inflation is higher than the November forecast’.
King blamed factors which he described as ‘outside of the Bank’s control’, such as increases in university tuition fees and utility bills.
‘Growth is likely to be weak in the near term,’ King admitted, but urged that the best thing to do was nothing, saying: ‘Attempting to bring inflation down to target soon would risk derailing the economy.’
King concluded with an attempt at half-hearted bravado, saying: ‘The challenge of rebalancing the world economy means that our road to recovery will be harder than in 1993, but recover we will.’
Under questioning, King added: ‘There’s a limit to the extent that any monetary policy can go on trying to stimulate private sector demand in a set of circumstances – this is the key point – in a set of circumstances when the private sector has come to the realisation that the path along which private demand was moving was unsustainable.’
He added: ‘Clearly the attempt to put up the prices charged by utilities as a means of financing investment or paying for green charges, green policies, all of these things are pushing up administered prices in a way that does not reflect any change in the underlying economy.
‘If you like it’s a bit of a self-inflicted goal in terms of damage done to real takehome pay.
‘That’s another way of trying to implement fiscal consolidation through moving up the price level.
‘But it’s clearly affecting real takehome pay. . .
‘So I am afraid that to the extent that the inflationary pressures are coming from outside, through administered prices and regulated prices, not only do we have no control over that, it is actually impossible for us to predict it.’