Fears growing over high inflation levels

Jan 21 2010 by Iain Laing, The Journal

THE impact of the UK's freezing weather and January's VAT rise have sparked fears over a bigger-than-expected inflation spike this year, minutes of the Bank of England's January meeting have revealed.

Bank policymakers voted unanimously to stand firm in emergency efforts to aid the economy two weeks ago, with interest rates held at 0.5% .

But the minutes of the Monetary Policy Committee meeting said the VAT hike and the potential impact of the cold on energy prices “suggested that inflation in the short term would be further above target than the committee had previously expected”.

Earlier this week figures showed a record rise in the annual rate of inflation for a single month in December, with the Bank’s Consumer Prices Index (CPI) benchmark jumping from 1.9% to 2.9%.

The minutes said it was “increasingly probable” that CPI would rise well above the Bank’s 2% target for several months”.

The MPC will make a more detailed assessment of the UK’s prospects next month.

Rate-setters said there were signs that the economy had begun to grow again – “albeit weakly”.

The MPC warned over a squeeze on credit for a “sustained period” as banks repair their balance sheets, higher savings levels by cautious households and the urgent need to sort out the public finances.