Bank chief warns over inflation

The Governor of the Bank of England has warned that there is a “great deal of uncertainty” over the outlook for inflation after the rate soared to its highest level in more than two years.

In a letter to Chancellor George Osborne, Mervyn King said inflation is likely to continue to pick up to between 4% and 5% over the next few months and admitted there are “real differences of view” among Bank policymakers.

The Governor’s comments came as the Office for National Statistics (ONS) revealed that the Consumer Prices Index (CPI) rate of inflation hit 4% in January, up from 3.7% in December.

The ONS said inflation was being driven up by soaring commodity prices, such as crude oil, as well as the impact of the VAT rise from 17.5% to 20% last month.

The governor is required to write a letter of explanation to the Chancellor when inflation has been 1% or more above the Government’s 2% target for three months in a row.

In his letter, Mr King said the high level of inflation was down to the rise in VAT, the low value of the pound and rising energy prices. He said: “There is a great deal of uncertainty about the medium-term outlook for inflation. And I do not wish to conceal there are real differences of view within the committee, reflecting different judgements about the risks to that outlook.

“Inflation is likely to continue to pick up to somewhere between 4% and 5% over the next few months ahead.”

The governor said the MPC believes that pulling inflation back to target quickly could damage economic growth and would increase the risk of undershooting the 2% target.

Mr King said there was a risk that the high cost of living could increase inflation expectations and thereby pull up wages and other prices, adding: “Inflation is likely to remain above target for this year, before falling back in 2012.”

After holding interest rates at 0.5% and the level of quantitative easing at £200 billion at this month’s meeting, Mr King said the MPC was “conscious that there are large risks in both directions”.