The Bank of England expects inflation to rise sharply during the first half of the year before receding next year, said the Governor Mr. Mervin King.
However, he said that there were ‘large risks’ that headline inflation may overshoot or undershoot the bank’s target rate of 2%.
Global price rise of food and crude oil is driving inflation, he said, indicating that excess liquidity is not the cause of price-rise and an interest rate rise may have marginal effect. The bank’s November growth forecast will not be achieved by the economy, he said.
Once the global commodities prices cool down “CPI inflation will then fall back. But the extent to which it will do so is uncertain, and there are large risks in both directions”, he said.
Data released yesterday by the Office for National Statistics (ONS) showed that inflation, as measured by Consumer Price Index (CPI), touched 4% in January from 3%, recorded in December. The other barometer of inflation – The Retail Price Index (RPI), which includes mortgage payments, touched 5.1% in January from 4.8% in December.
Spiraling inflation forced Mr. King to write a letter to the Chancellor – George Osborne, explaining why inflation was at twice the level of the Bank’s target.