Restraint call after CPI hits 4%
RAISING interest rates in the first half of the year would be a “mistake” despite new figures showing CPI inflation rose to 4% last month, according to the British Chambers of Commerce.
Chief economist David Kern urged the Monetary Policy Committee to continue with its cautious approach to bank rates after the Office for National Statistics blamed the increase in VAT and the price of crude oil as the main factors behind the inflation rise.
He said: “The increase in inflation to 4% was exactly as most analysts expected, and there was even some relief in the markets that the outcome was not worse. The present situation is uncomfortable for the MPC. But, in the face of higher taxes, increased utility bills, and surges in food and energy prices, it is still likely that consumer price inflation will increase towards 4.5% before it stabilises.
“We believe that a premature hike in interest rates would make no difference to inflation in the short-term, but would put the recovery at risk. It would also make it more difficult for the Government to implement measures aimed at cutting the deficit. Raising interest rates at a time when fiscal policy is being tightened will heighten pressures facing businesses and individuals. Over the medium term, the MPC is right to assume that inflation is likely to fall gradually towards its 2% target.
“We believe that interest rates will probably have to rise later this year, but it is critical that the MPC waits until the initial impact of the austerity measures have been absorbed. Considering an increase in interest rates before the middle of the year would be a mistake.”
The 4% figure, up from 3.7% in December means CPI is now at its highest since November 2008.
Graeme Leach, chief economist at the IoD, said: “Inflation at 4% is double the target rate but this does not mean that interest rates have to rise. With money supply growth close to zero it is hard to believe that inflation is moving out of control.
“Money supply growth still suggests that the medium term threat is deflation not inflation. We’re in for a roller coaster ride as inflation heads north this year and south next year.”
RPI inflation was for the year to January was 5.1%, up from 4.8% the previous month. The RPIX rate – RPI excluding mortgage payments – rose from 4.7% to 5.1%.
Ian McCafferty, CBI chief economic adviser, said: “Everyone was expecting inflation to increase in January. The rise to 4.0% reflects higher petrol prices and the pass through of the VAT increase particularly in the hospitality sector.
“However, the effect of the rise in VAT was slightly less in January than had been expected, and seasonal discounting, particularly for clothing and footwear, also had an impact.
“We expect that inflation will be well above target for the remainder of the year.”
