Bank to release inflation report

The Bank of England’s latest quarterly inflation report will provide the economic highlight next week.

Inflation will take centre stage among the week’s economic data as the Bank of England’s quarterly report comes a day after official figures for January’s cost of living on Tuesday.

Inflation unexpectedly shot up to 3.7% in December, from 3.3% in November, to its highest level since April, the Office for National Statistics (ONS) said. Inflation expectations driven by the January VAT hike and soaring oil and food prices were all to blame.

The surge piled pressure on the Bank of England to raise interest rates to curb the soaring consumer prices index rate of inflation, but just as the hawkish members of the Monetary Policy Committee (MPC) – such as Andrew Sentance – were looking close to getting their way, the ONS revealed the economy went into shock decline in the final three months of 2010 by 0.5%.

The figures highlighted the fragile position the economy has found itself in – teetering close to a period of so-called stagflation, when sluggish growth and high unemployment combine with soaring prices.

Possibly considering the weaker-than-expected fourth-quarter GDP figures, the MPC held its nerve and kept rates at their 0.5% historic low for a 23rd consecutive month.

Further pressure is expected from January’s CPI figures, as analysts expect the rate to surge again to around 4.1%. However, the Bank has previously stated it expects inflation to move towards 5% in the coming year.

So analysts will be looking closely at the latest inflation report on Wednesday and listening keenly to what Bank governor Mervyn King has to say in his speech to determine when the MPC believes inflation will return to the 2% target.

Mark Cliffe, chief economist at ING Group, said while the Bank may come under pressure to lift rates, the inflation threat is exaggerated.

He said tax rises are having a temporary impact, while food and energy prices should peak this year and wage inflation will be subdued as unemployment is expected to rise. “Interest rates are unlikely to rise as quickly as expected,” he added.