UK inflation jumps to 1.5% but CEBR expects 3%

UK inflation jumped to 1.5% from a five-year low and the CEBR is says it will soon rise to 3%. “The danger for the UK economy is if rising global commodity prices result in imported inflation; forcing the Bank of England’s hand into tightening monetary policy sooner than the fragile economy needs,” said the economists.

 “If the VAT cut is reversed in January it is likely that consumer price inflation will briefly surpass the upper limit of the Bank of England target at 3%. A key driver of the upward movement in the year-on-year change in prices was increased transport costs. Oil prices briefly surpassed $80 a barrel in recent weeks – having dipped below $40 at the nadir of the global recession.”

The effect has been to gradually push up fuel costs although the price of fuel and lubricants fell by 0.7 per cent in October from September this compares with a 6.1% fall this time last year. Transport costs rose by 3.5% year-on-year in October but inflation in other key areas of household expenditure remains steady and low; electricity prices were 8.2% lower than a year earlier in October while gas prices were down by 5.9%.

The CEBR said inflationary pressures remain relatively subdued but core inflation (excluding volatile energy, food, alcohol and tobacco prices) remains steady at 1.8%. Annual inflation will continue to rise in the coming months but this is not the major concern.

Their worry is how things look further into 2010, “as bank lending remains weak and fiscal tightening kicks in we expect interest rates to remain on hold through 2010 and are not ruling out more QE, although this is unlikely in the short term."