"Surprising" UK inflation stickiness proves failure of "output gapology"
Simon Ward
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Disappointing February figures support the forecast here that UK CPI inflation will remain comfortably above the 2% target throughout 2012.
The annual CPI increase subsided from 3.6% in January to 3.4% but a larger decline had been expected, reflecting slower energy and food price gains and a favourable VAT base effect – consumer suppliers were probably still passing on the 2.5 percentage point standard rate rise in February last year.
The disappointment is highlighted by an estimate of “core” prices that excludes unprocessed food and energy and attempts to adjust for VAT changes – the calculation assumes that 90% of last year’s standard rate rise was passed on to consumers, with the effect spread over October 2010-February 2011. Annual inflation on this measure rose to a 26-month high of 2.9%, with six-month seasonally-adjusted momentum even stronger – see first chart.
These developments cast strong doubt on the Bank of England’s continued assertion that substantial excess capacity in the economy will bear down on core inflation.
Further evidence of inflationary risks was provided yesterday by the March CBI industrial trends survey, showing a jump in price-raising plans, in turn suggesting a rebound in annual CPI goods inflation – second chart.
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