Inflation expected to remain high

Preston and Leyland Citizen: The Bank of England has warned that it expects inflation to remain above the Government's two per cent target The Bank of England has warned that it expects inflation to remain above the Government's two per cent target

The continued pressure on household finances will be revealed when figures for January show inflation has remained stubbornly high.

Discounting in the clearance sales is likely to have failed to offset the impact of the latest energy price hikes, with most economists predicting the rate of consumer price inflation (CPI) in January was 2.7% for the fourth month in a row.

The Bank of England is due to publish its latest quarterly economic report on Wednesday and has already warned it expects inflation to remain above the Government's 2% target, possibly for as long as the next two years. It means that one of Mark Carney's first tasks as Governor this summer could be to write a letter to the Chancellor to explain why inflation is more than 1% above target.

Samuel Tombs, economist at consultancy Capital Economics, said CPI inflation looked set to climb above 3% in the first half of the year as the last of the utility price hikes take effect and as the anniversary of last Spring's price cuts is reached.

He added: "The wettest year since Noah's Ark set sail has led to poor domestic food harvests. The resulting pick-up in domestic food producer price inflation points to a rise in food CPI inflation to about 6% soon. While supermarkets could absorb some of the increase in prices, many have warned that they will pass on the higher costs."

He also said the recent rise in oil prices in sterling terms meant that petrol prices were set to rise by about 3% in February.

The inflation figures of recent months are causing problems for policymakers as they weigh up mounting signs of economic gloom after the latest gross domestic product figures showed the economy contracted in the final three months of last year.

The Bank held off more money printing measures last week, keeping its quantitative easing programme at £375 billion, while it also kept interest rates at 0.5%. Announcing no change in monetary policy, the Bank said that the recent decline in sterling will put further pressure on the cost of living.

Higher inflation is putting pressure on consumer spending as wages grow at a slower rate. But it is thought that lower month-on-month fuel costs in January and a smaller than average rise in rail fares will hold inflation at 2.7% .

Howard Archer, chief UK and European economist at IHS Global, is pencilling in a fall in consumer price inflation to 2.5% and said he suspected significantly deeper discounting by retailers in the clearance sales would have brought inflation down.

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