December 14, 2010 / 9:34 AM / 9 years ago

Inflation unexpectedly hits 6-month high in November

LONDON (Reuters) - Inflation rose to a six-month high in November, extending a run of upside surprises and denting lingering hopes of further monetary easing by the Bank of England.

A church spire is seen in front of financial office buildings at Canary Wharf in east London August 17, 2010. REUTERS/Toby Melville

Annual consumer price inflation rose to 3.3 percent last month from October’s 3.2 percent, marking the 11th consecutive month it has been at least a percentage point above the Bank’s 2 percent target.

Sterling rose and gilts fell as the data reinforced expectations the Bank would raise interest rates before the end of next year — timing that could be uncomfortable for Britain’s coalition government in the midst of the harshest austerity drive in generations.

Andrew Sentance, the most hawkish member of the Bank’s Monetary Policy Committee, said the data strengthened his view that interest rates should rise now.

“I think we would reinforce our credibility by gradually moving interest rates upwards,” Sentance said, saying public confidence in the Bank’s will to fight inflation could be at risk if it takes no action while inflation is above target.

Inflation looks set to rise even higher at the start of next year when VAT sales tax jumps to 20 percent from 17.5 percent and utility providers jack up tariffs.

Although wage inflation has so far remained low, policymakers are concerned that a prolonged period of above-target inflation could lead to a wage-price spiral, particularly if the recovery stays on track.

“With GDP growth well above trend and inflation persistently above the target, there is now a negligible chance that the Bank embarks on another round of QE and, in fact, a non-negligible risk of dislodging inflation expectations,” said UBS economist Amit Kara.

CREDIBILITY QUESTION

Bank Deputy Governor Charles Bean said on Monday that policymakers were watching price pressures “like proverbial hawks” and admitted inflation had been above target for an uncomfortably long time.

However the Bank has already acknowledged that inflation will stay above 3 percent all next year, and analysts said Tuesday’s data — while disappointing — was not necessarily a game-changer for monetary policy.

“The Monetary Policy Committee is unlikely to respond to this surprise,” said Barclays Capital economist Fabio Fois. “The committee has nailed its colours to the mast: it views the current high rate of inflation as temporary.”

Further signs that price pressures are growing could test the Bank’s ability to keep monetary policy loose, however, especially if consumer and investor confidence that inflation will come back down begins to falter.

“The MPC is putting its credibility on the line,” said Barclay’s Fois. “If inflation rises further, as we expect, the situation is set to become even more uncomfortable.”

COMMODITY PRICES UP

The biggest upward thrust to annual inflation came from food prices, which rose at their fastest pace in over a year, and clothing prices, which gained at their fastest pace on record.

Food and drink prices rose by an annual 5.5 percent, with bread, cereals and poultry accounting for the biggest increases. Wheat prices have surged around 60 percent since June due to poor weather in Russia, Australia and Argentina.

Higher cotton prices helped lift clothing costs by an annual 2.1 percent, the fastest rate since comparable records began in 1997.

Slowdowns in the pace of inflation for transport, recreation and culture, and restaurants and hotels, were not enough to stop the rise in the overall figure.

The retail price inflation gauge, which includes more housing costs and is the benchmark for many wage deals, rose at an even faster pace — to 4.7 percent from 4.5 percent in October.

“If inflation expectations start to respond, there is a danger that the Bank may be forced to tighten monetary policy just as the biggest fiscal squeeze for decades is hitting the economy,” said Jonathan Loynes at Capital Economics.

Editing by Catherine Evans, John Stonestreet

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