Sterling through $2 as UK inflation hits 3.1%
Sterling through $2 as UK inflation hits 3.1%
By Jamie Chisholm, Economics Reporter and Ben Hall
Copyright The Financial Times Limited 2007
Published: April 17 2007 09:55 | Last updated: April 17 2007 15:24
UK consumer price inflation in March hit its highest level since comparable records began on Tuesday, sending sterling through the $2 barrier and resulting in Mervyn King, Bank of England governor, having to write a letter of explanation to Gordon Brown, the chancellor.
Video: UK Daily View
Chris Giles, economics editor, on the pound hitting $2 for first time since 1992
Mr King blamed the sustained rise in inflation partly on sharp increases in food, electricity and gas prices over the past year, but also on businesses discovering a greater degree of pricing power as the economy continued to grow.
“CPI inflation is likely to fall back within a matter of months”, Mr King said as announced cuts in gas and electricity prices take effect. March’s inflation figure “seems unlikely to alter the broad picture painted in the February [inflation] report,” he added.
That report had suggested another interest rate rise would be needed to bring inflation under control.
Mr Brown said that Mr King’s open letter on inflation proved that the system he introduced in 1997 was “achieving exactly what it is designed to do”.
The chancellor said inflation stemming from higher oil prices were affecting leading economies and not just the UK. “The exchange of letters between the chancellor and the governor today on economic policy show that inflationary pressures have been a feature of all advanced industrial economies in recent times,” he told a lunch in Whitehall.
“The pressures have originated in energy and utility prices around the world. Pressures have also come from higher seasonal food prices. The open letter system is achieving exactly what it is designed to do: to transparently identify the sources of inflation in our economy and to ensure if necessary action is being taken.”
He said the letters showed that Bank of Engtland expected inflation to fall “significantly” in coming months “and that we have played our part with a fiscally-neutral budget and with this year’s public pay settlement of 1.9 per cent, below our inflation target.”
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The Office for National Statistics said its index of consumer prices climbed by 0.5 per cent between February and March taking the annual inflation rate to 3.1 per cent, up from 2.8 in February.
It was the 11th month in a row that the annual increase in the CPI has been above the government’s 2 per cent target and was much stronger than analysts had forecast. It was also the highest level recorded since the series began in January 1997.
Any reading that is more than 1 percentage point above or below the 2 per cent target requires the Bank governor to write a letter saying why the target is being missed and explaining what will be done to bring inflation in line.
Sterling surged to $2.003 on the CPI date before pulling a back a little, but news of weaker than expected US inflation sent it back to $2.007 in early afternoon trading in London.
Equities and gilts fell as traders added to bets that further interest rate rises would be needed to quell inflationary pressures.
The Bank left rates unchanged at 5.25 per cent at its monetary policy committee meeting earlier this month.
A rise to 5.5 per cent at the May meeting is considered by many analysts to be a certainty, and some are beginning to talk of the possibility the rate-setting monetary policy committee may decide to increase borrowing by more than the usual quarter of a percentage point.
Richard McGuire at RBC Capital Markets said: “The unexpectedly high degree of price pressures evident in these data sees a rate move in May as in the bag. The market, will now, however, begin to speculate as to whether a 50 basis point move might be on the cards.”
The ONS said that the largest upward effect on the annual inflation rate came from food and non-alcoholic beverages.
Milk prices, for example, were up by more than 2 per cent in March, having dropped by 8 per cent at the same time last year. Bread, cereals and meat prices were also higher.
Furniture and household equipment prices were also sharply higher, buoyed by a strong property market.
Energy prices provided some relief, with gas prices falling.
The Retail Price Index, a measure that includes interest payments on mortgages, rose by 4.8 per cent in the year to March.
In response to Mr King’s letter, the chancellor said inflationary pressures “have been a feature of the major industrial economies in recent times.” He welcomed the governor’s commitment to bring inflation down and agreed “that the monetary policy committee’s approach is appropriate to meet the government’s monetary policy objectives”.
Tony Blair, prime minister, said it was ‘‘remarkable’’ that the governor had not needed to write a letter before.
Speaking at his monthly press conference in Downing Street, he said: ‘‘This is the first time the governor has had to write such a letter, but he says in the course of the letter that he expects inflation to come back down to around the target later in the year.”
He added: ‘‘The fact is that we have seen 10 years of the most steady rises in living standards that this country has seen probably at any time since the Second World War.’’
By Jamie Chisholm, Economics Reporter and Ben Hall
Copyright The Financial Times Limited 2007
Published: April 17 2007 09:55 | Last updated: April 17 2007 15:24
UK consumer price inflation in March hit its highest level since comparable records began on Tuesday, sending sterling through the $2 barrier and resulting in Mervyn King, Bank of England governor, having to write a letter of explanation to Gordon Brown, the chancellor.
Video: UK Daily View
Chris Giles, economics editor, on the pound hitting $2 for first time since 1992
Mr King blamed the sustained rise in inflation partly on sharp increases in food, electricity and gas prices over the past year, but also on businesses discovering a greater degree of pricing power as the economy continued to grow.
“CPI inflation is likely to fall back within a matter of months”, Mr King said as announced cuts in gas and electricity prices take effect. March’s inflation figure “seems unlikely to alter the broad picture painted in the February [inflation] report,” he added.
That report had suggested another interest rate rise would be needed to bring inflation under control.
Mr Brown said that Mr King’s open letter on inflation proved that the system he introduced in 1997 was “achieving exactly what it is designed to do”.
The chancellor said inflation stemming from higher oil prices were affecting leading economies and not just the UK. “The exchange of letters between the chancellor and the governor today on economic policy show that inflationary pressures have been a feature of all advanced industrial economies in recent times,” he told a lunch in Whitehall.
“The pressures have originated in energy and utility prices around the world. Pressures have also come from higher seasonal food prices. The open letter system is achieving exactly what it is designed to do: to transparently identify the sources of inflation in our economy and to ensure if necessary action is being taken.”
He said the letters showed that Bank of Engtland expected inflation to fall “significantly” in coming months “and that we have played our part with a fiscally-neutral budget and with this year’s public pay settlement of 1.9 per cent, below our inflation target.”
Share your views
How low can the dollar go? Have your say in our online forum
The Office for National Statistics said its index of consumer prices climbed by 0.5 per cent between February and March taking the annual inflation rate to 3.1 per cent, up from 2.8 in February.
It was the 11th month in a row that the annual increase in the CPI has been above the government’s 2 per cent target and was much stronger than analysts had forecast. It was also the highest level recorded since the series began in January 1997.
Any reading that is more than 1 percentage point above or below the 2 per cent target requires the Bank governor to write a letter saying why the target is being missed and explaining what will be done to bring inflation in line.
Sterling surged to $2.003 on the CPI date before pulling a back a little, but news of weaker than expected US inflation sent it back to $2.007 in early afternoon trading in London.
Equities and gilts fell as traders added to bets that further interest rate rises would be needed to quell inflationary pressures.
The Bank left rates unchanged at 5.25 per cent at its monetary policy committee meeting earlier this month.
A rise to 5.5 per cent at the May meeting is considered by many analysts to be a certainty, and some are beginning to talk of the possibility the rate-setting monetary policy committee may decide to increase borrowing by more than the usual quarter of a percentage point.
Richard McGuire at RBC Capital Markets said: “The unexpectedly high degree of price pressures evident in these data sees a rate move in May as in the bag. The market, will now, however, begin to speculate as to whether a 50 basis point move might be on the cards.”
The ONS said that the largest upward effect on the annual inflation rate came from food and non-alcoholic beverages.
Milk prices, for example, were up by more than 2 per cent in March, having dropped by 8 per cent at the same time last year. Bread, cereals and meat prices were also higher.
Furniture and household equipment prices were also sharply higher, buoyed by a strong property market.
Energy prices provided some relief, with gas prices falling.
The Retail Price Index, a measure that includes interest payments on mortgages, rose by 4.8 per cent in the year to March.
In response to Mr King’s letter, the chancellor said inflationary pressures “have been a feature of the major industrial economies in recent times.” He welcomed the governor’s commitment to bring inflation down and agreed “that the monetary policy committee’s approach is appropriate to meet the government’s monetary policy objectives”.
Tony Blair, prime minister, said it was ‘‘remarkable’’ that the governor had not needed to write a letter before.
Speaking at his monthly press conference in Downing Street, he said: ‘‘This is the first time the governor has had to write such a letter, but he says in the course of the letter that he expects inflation to come back down to around the target later in the year.”
He added: ‘‘The fact is that we have seen 10 years of the most steady rises in living standards that this country has seen probably at any time since the Second World War.’’
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