Britain's benchmark inflation rate may be catapulted to 4pc, perhaps as soon as Tuesday's release of January's data, economists have predicted.
The Bank of England Governor, Mervyn King, has already predicted that the Consumer Price Index is likely to exceed 3pc when figures are published on Tuesday, forcing him to write a letter of explanation to the Chancellor. However, economists said that the scale of increase for the CPI could be greater even than most expect. They said that it is likely to hit 4pc at some point in the coming months.
CPI hit 2.9pc in December, rising by the biggest monthly amount in recent history.
The warning comes with the benchmark 10-year gilt yield having risen to a higher level than those of both Italy and Spain, in a clear sign of investors' concerns about Britain's willingness to put up with a higher rate of inflation.
John Hawksworth, head of macroeconomics at PricewaterhouseCoopers, said: "We expect headline CPI inflation to rise to around 4pc in January 2010 as petrol price falls in late 2008 fall out of the annual inflation rate calculation and due to the effect of VAT going back up to 17.5pc from 1 January. But this will be a temporary spike and we would expect inflation to be back down to its 2pc target rate by the end of 2010 and to remain at or below target during 2011."
However, the sharp increase in prices will cause a further erosion of families' incomes over the course of the year, since wage growth is near-stagnant and each pound families are paid is going comparatively less far. Frances O' Grady, deputy general secretary of the Trades Union Congress, will say today in a pay bargaining conference in London: "The UK's deep recession and low inflation have inevitably pushed wage settlements down.
"With inflation rising, it is only right that both private and public sector staff should look to pay increases in the year ahead. If staff are not paid properly then companies will have no one to buy their goods and services."
The gilt yield has also been pushed higher by fears that the next Government will not clamp down on the budget deficit fast enough. However Alistair Darling, the Chancellor, insisted that any extra growth-related tax revenues would be used to pay off debt.
More from CyberToryGraph
The Bank of England Governor, Mervyn King, has already predicted that the Consumer Price Index is likely to exceed 3pc when figures are published on Tuesday, forcing him to write a letter of explanation to the Chancellor. However, economists said that the scale of increase for the CPI could be greater even than most expect. They said that it is likely to hit 4pc at some point in the coming months.
CPI hit 2.9pc in December, rising by the biggest monthly amount in recent history.
The warning comes with the benchmark 10-year gilt yield having risen to a higher level than those of both Italy and Spain, in a clear sign of investors' concerns about Britain's willingness to put up with a higher rate of inflation.
John Hawksworth, head of macroeconomics at PricewaterhouseCoopers, said: "We expect headline CPI inflation to rise to around 4pc in January 2010 as petrol price falls in late 2008 fall out of the annual inflation rate calculation and due to the effect of VAT going back up to 17.5pc from 1 January. But this will be a temporary spike and we would expect inflation to be back down to its 2pc target rate by the end of 2010 and to remain at or below target during 2011."
However, the sharp increase in prices will cause a further erosion of families' incomes over the course of the year, since wage growth is near-stagnant and each pound families are paid is going comparatively less far. Frances O' Grady, deputy general secretary of the Trades Union Congress, will say today in a pay bargaining conference in London: "The UK's deep recession and low inflation have inevitably pushed wage settlements down.
"With inflation rising, it is only right that both private and public sector staff should look to pay increases in the year ahead. If staff are not paid properly then companies will have no one to buy their goods and services."
The gilt yield has also been pushed higher by fears that the next Government will not clamp down on the budget deficit fast enough. However Alistair Darling, the Chancellor, insisted that any extra growth-related tax revenues would be used to pay off debt.
More from CyberToryGraph
Comment