Tuesday, January 18, 2011
What inflation rate will move the Bank?
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Consumer price inflation rose more than expected last month, rising to 3.7% (from 3.3% in November) against the expected 3.4%. RPI inflation rose by less, but was nevertheless up from 4.7% to 4.8%. Inflation was boosted by higher energy and food prices, together with air fares. December's food price rise was the biggest on record, while the rise in petrol prices represented the biggest since 1996.

The markets are convinced that inflation will climb above 4% in January and remain around 4% for most of the year. The only thing that could stop it is if the VAT increases have already been priced in by retailers. There's some evidence of that but probably not enough to prevent 4% - double the Bank of England's target. Even CPIY, excluding indirect taxes, which I mentioned on Sunday, rose from 1.6% to 2%.

What will persuade the Bank to hike interest rates? It will have known of these figures last Thursday when it held rates steady. If it continues to hold in February, when it will have new, higher inflation projections, the inference will be that the monetary policy committee is prepared to look through this period of high inflation for some time to come. More on the numbers here.