Rise British inflation rate exceeds estimations

11-18-2009 07:18

The British inflation rate increased for the first time in eight months, exceeding economists’ estimations in October, on the back of rising air fares and fuels costs. The statistics office reported today that consumer prices climbed 1.5% in the yearly comparison, while they rose by 1.1% in September. On a monthly basis, consumer prices gained 0.2%.

Instability

Bank of England's Monetary Policy Committee member Andrew Sentance stated yesterday that inflation may face “instability” and could lead to surpassing the target of 2% after two years. Sentance believes that it’s still premature to think about tightening policy as the BoE increased its bond-purchase plan to £200 billion ($336 billion) in order to prevent deflation.
ING economist James Knightley said: “This is the start of a number of strong rises in headline inflation during the following months. It will not be necessary to tighten monetary policy earlier, considering the excess capacity in the economy. It is expected that the inflation level will drop rather heavily at the end of 2010.”

Possible further expansion

Bank of England policy makers agreed in November to expand the bond-purchase plan by £25 billion with newly printed money, while they didn’t change the interest rate of 0.5%.
Mervyn King, Governor of the Bank of England, stated last week that he is willing to think about a possible further expansion.

British inflation rate

The UK inflation level rose due to rates of lubricants and fuels that fell less in 2009 than in the same period in 2008, according to figures by the Office for National Statistics. The prices of air tickets rose in 2009, as they declined in 2008, while used cars suffered from a lack of stock, which led to a record rise in prices.
EasyJet Airline Company Limited, headquartered at London Luton Airport, reported this Tuesday that profit per seat at constant currency increased by 4.1% during the period that ended September 30, as a result of the economic slump that favored budget carriers.

Remain moderated

Last week, BoE released new forecasts regarding inflation and quarterly growth, which demonstrated that the inflation level will not reach the target of 2% before 2012, as it will surpass the target through the turn of the year due to the fact that a provisional reduce in value-added tax runs out.
Sentance added: “In the near term, inflation will probably fall below target, while we also expect some instability. As the economy recovers further, inflation will face some upward pressures.”
However, Ben S. Bernanke, chairman of the US Federal Reserve, commented last Monday that inflation “is likely to remain moderated during a certain period”, as the weak employment situation and less bank lending decelerate economic growth. The Federal Reserve’s preferred inflation indicator, which doesn’t include energy and food prices, climbed 1.3% in September compared to last year, under the 2% target preferred by most of the Federal Reserve policy makers.