Wednesday, 11 May 2011

5% inflation is odds-on

The governor of the Bank of England, Mervyn King, has said that there is a "good chance" that inflation will rise to 5% later this year, pushed up by further increases in the cost of gas and electricity.

Meanwhile, the Bank's quarterly Inflation Report showed the growth rate of the economy falling back.

The Bank of England's view on inflation is watched carefully for clues on future interest rates rises and the pace of the recovery.

Mervyn King is expecting a 15% rise in gas bills and a 10% increase in the cost of electricity in the months ahead. So he no longer expects the Consumer Prices Index or CPI to peak at between 4 and 5 per cent as he said January.

Now the 5 per cent rate is the Bank's central projection for the autumn, which means inflation could climb even  higher.

Economists are taking this as another sign that the Bank will start to push up interest rates from their historic lows before the end of the year, in November or December.

This is despite the fact that the Bank has scaled back its forecast for economic growth this year from just over 2% to around one and three quarters.

The increasingly gloomy economic outlook had prompted some forecasters to suggest the long-awaited hikes in rates could be delayed until next year.

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