From Reuters on Tuesday:
LONDON, Jan 19 (Reuters) – British consumer price inflation rose at its fastest annual pace in nine months in December as a cut in value added sales tax, heavy discounting and a sharp fall in oil prices at the end of 2008 were not repeated in 2009, the Office for National Statistics said on Tuesday.
Oh dear, oh dear.
Looks like it could be time for Bank of England governor Mervyn King to stock up on some paper and ink in anticipation of a bit of letter writing in the months to come.
At 2.9 per cent, the December CPI rate announced by the ONS on Tuesday was tracking perilously close to the 3 per cent mark beyond which the governor is obliged to write explanatory letters to the UK chancellor.
And while the ONS may have blamed the December inflation spike on unfavourable comparatives including a cut in VAT, heavy discounting and a sharp fall in oil prices the year before, that wouldn’t explain the rate coming so much higher than forecasts.
Howard Archer over at IHS Global Insight, for one, was disconcerted:
Even allowing for the unfavourable statistical distortions coming from sharply falling oil prices a year ago and the December 2008 VAT cut, the data will not go down at all well at the Bank of England.
Consumer price inflation spiked up much more than expected to a nine-month high of 2.9% in December, thereby moving substantially above the Bank of England’s target level of 2.0%.
Indeed, it now seems a stone dead certainty that Bank of England governor Mervyn King will be writing a “Dear Chancellor” letter next month to explain why consumer price inflation in January rose more than one percentage point above its target level and what the Bank of England is doing about it.
More worryingly, as added:
It is evident that inflation was not only pushed up in December by the unfavourable base effects resulting from VAT being cut from 17.5% to 15.0% and oil prices falling sharply in December 2008, but also by substantially less discounting by retailers in December 2009 compared to a year ago when they were hugely concerned about sales prospects for the critical Christmas period as economic activity nosedived.
All of which, says Archer, could prompt the Bank of England to end it’s QE programme come February and begin raising rates before the end of the year — noting the odds have shortened appreciably that the bank could move even before the fourth quarter.
The same interpretation, meanwhile, was to be had from Richard McGuire at RBC Capital Markets:
“Considerably firmer than anticipated and setting CPI inflation up for a clear breach of the BoE’s 3.0% ceiling once the January VAT hike is factored in. While some of today’s pressures may have been the product of retailers “front running” this tax change – upping prices in December so as to advertise a deferral of the VAT change in the New Year – they still see inflation running at a discernibly faster clip than the BoE had anticipated – a 2.15% print would have been required today for the Bank to hit its forecast of inflation averaging 1.85% in Q4 ’09. Although the BoE will continue to look to the considerable slack that has opened up in the economy as justifying its view the current inflation spike will prove a transitory affair, today’s numbers make a compelling case for, at the very least, taking a breather as regards QE come February 4.
Hence the below gilt reaction:
Related links:
What Google says about inflation - FT Alphaville
UK inflation fan-dango – FT Alphaville