U.K. Inflation Rate Probably Jumped Most on Record in December
The U.K.’s inflation rate probably jumped the most in at least 12 years in December as the economy shook off the recession and oil prices rose, economists say.
Consumer prices climbed 2.6 percent from a year earlier, compared with a 1.9 percent gain the previous month, according to the median forecast of 30 economists in a Bloomberg News survey. The 0.7 percentage-point jump would be the most since comparable records began in 1997. The Office for National Statistics will publish the data at 9.30 a.m. today in London.
The data would be the first since May showing inflation above the Bank of England’s 2 percent target, presenting a challenge to officials as they assess when to start raising interest rates from a record low. Gordon Brown’s spokesman said last week that the prime minister, who faces an election by June, is confident the economy has returned to growth.
“While the economy has been in recession the Bank of England hasn’t been focusing on inflation but it will become more of a concern,” Michael Saunders, chief economist for western Europe at Citigroup Inc, said in an interview. “I think they’ll hike rates in the second or third quarter.”
Saunders predicts the Bank of England will raise the benchmark interest rate to 1.5 percent by the end of the year. Officials makers have kept the rate at 0.5 percent since March. He says January data for inflation due next month will breach the government’s 3 percent upper limit, and it will reach 4 percent by the middle of the year.
Inflation, which troughed at 1.1 percent in September, has accelerated since then as energy costs increased and the economy recovered from the slump.
Producer Prices
Crude oil has doubled in the past 12 months, raising consumer gasoline costs. Producer prices jumped 0.5 percent in December, more than twice as much as the median forecast of economists in a survey by Bloomberg News.
The factory-gate data in part reflect the weakness of sterling. The pound has dropped by about a quarter in the past two years against a trade-weighted basket of currencies, raising the cost of imports for manufacturers.
Finance Minister Alistair Darling’s temporary 2.5 percentage-point reduction in sales tax in December 2008 to stimulate the economy will drop out of the annual comparison in the data for December 2009 and also raise the inflation rate, Saunders said.
For now, Bank of England officials say inflation will accelerate before dipping below the target later this year because of slack in the economy after the recession. Policy makers are showing few signs of unwinding emergency measures designed to fight deflation after they pledged to buy 200 billion pounds ($327 billion) of bonds. The bank will release new forecasts on Feb. 10.