Bank: Inflation on the up

Inflation is set to rise above the target rate over the coming months, the Bank of England has conceded.

The government's target consumer price index rose sharply to 1.9 per cent in March, up from 1.6 per cent in the previous month.

And publishing the Bank's latest quarterly inflation report on Wednesday, governor Mervyn King conceded that it would rise further, above the two per cent target level.

"In the MPC's central view, inflation rises above the two per cent target for a short while in the first year of the projection," said the report.

"The short-term profile is affected by a number of temporary factors.

"Increases in oil, electricity and gas prices have already pushed up the published inflation rate.

"Furthermore, large increases in charges for water and sewerage services were introduced in April this year, and their impact should soon be evident in the CPI inflation data."

However, the report forecasts that inflation will move "back to the target in the first half of 2006".

"CPI inflation then settles at close to two per cent for the rest of the forecast period. The projection is higher in the short term compared with February, but lower further out," said the report.

King's surprise

At a press conference to launch the report, King conceded that the recent pickup in inflation has been "sharper than expected".

"Although inflation may rise a little further in coming months, it is then expected to fall back," he insisted.

He also said that the speed of the slowdown in consumer spending had also "come as a bit of a surprise".

King said that economic weakness abroad and slower consumer spending in the UK means that risks to growth are more likely to be on the downside.

But the Bank "stands ready to respond to the data as they unfold in order to meet the inflation target over the medium term", he said.

The Bank chief insisted that there was no danger of the return of 1970s-style 'stagflation' combining rising inflation and a slowing economy.

With growth forecast to remain close to trend of about 2.5 per cent and inflation on target, "that's about as far away from stagflation as you can possibly get" King said.