Published December 18, 2012
LONDON – British inflation defied forecasts in November to hold at its highest rate since May, reducing the scope for the Bank of England to inject more cash into the struggling economy.
Data on Tuesday showed that annual consumer price inflation remained at 2.7 percent after a surprise jump in October, confounding economists' forecasts for a dip to 2.6 percent.
High inflation, which peaked at 5.2 percent last year, has weighed on consumer spending, holding back the economy's recovery from its second recession in four years.
Investec economist Philip Shaw said inflation was likely to rise above 3 percent over the next few months, cutting chances the BoE will add to its 375 billion pounds of bond purchases.
"We feel a likely rise in inflation is going to result in the Monetary Policy Committee keeping policy on hold, but much depends on how weak the economy is," he said.
A fall in petrol prices was not enough to outweigh increased costs for electricity, gas and food. In addition, services price inflation rose to 4.2 percent, its highest since December 2011.
Last month, the central bank said inflation was likely to be much higher over the next 18 months than expected in August. Its projections showed it would take until the third quarter of 2014 before inflation fell below the BoE's 2 percent target, nine months later than predicted in August.
Inflation has been above 2 percent since December 2009, and the target itself has been questioned.
Last week the next BoE chief, now Bank of Canada Governor Mark Carney, raised the possibility of central banks targeting nominal gross domestic product -- a mix of GDP and inflation -- rather than a single inflation rate, though he stopped short of saying this would be right for Britain.
Stubborn inflation deterred some policymakers from approving another cash boost for the economy in November, and this month the BoE again voted against more government bond purchases.
Last week, MPC member Paul Fisher told Reuters that he would wait for signs that inflation was coming down before voting to extend asset purchases, or quantitative easing.
Other MPC members' views may become clearer when minutes of their December meeting are released on Wednesday.
Economists are divided over whether QE does much to support growth and jobs, and some fear it has only lifted inflation.
Weighing into the debate on Tuesday, parliament's influential Treasury committee called for additional evidence for its inquiry into QE, including on the policy's effectiveness and on other unconventional policy measures.
"What role QE can play going forward and how to handle its unwinding are two important questions," said Andrew Tyrie, who chairs the committee, adding that the parliamentarians would question Carney on those issues during a session in February.
A quarterly Bank of England report released on Tuesday concluded that QE succeeded in boosting money supply throughout its three rounds.
There was some good news on underlying inflation pressures from ONS data on producer prices also released on Tuesday.
Annual factory-gate inflation eased unexpectedly in November to 2.2 percent -- its lowest since July -- from an upwardly revised 2.6 percent in October, as input costs fell 0.3 percent on the year. The annual rate of fuel cost inflation eased to its slowest since February 2011, though imported food costs rose.