15/11/2011

Inflation At 5% But Expected To Drop 'Sharply'

This month's official inflation figures are still more than double the 'target rate' of 2%, although it is expected to drop "sharply", according to the Bank of England.

The Consumer Prices Index (CPI) in the UK fell slightly to 5% during October, down from a rate of 5.2% the month before.

Despite the fall, the government said it recognised that inflation remained high saying it was "difficult times for households" as prices continued to be affected by conditions in the global oil and gas markets, said a Treasury spokesperson.

However, in a letter the Chancellor on Monday, Mervyn King, head of the Bank of England, said the current high level of inflation was because of the high standard rate of VAT introduced by the Government earlier this year, along with previous steep increases in import and energy prices, including recent domestic utility price rises.

"In the absence of those temporary factors, it is likely that inflation would have been below the 2% target," Mr King Claimed.

In the letter, Mr King added that inflation would fall back sharply in the next six months or so, and continue falling thereafter to around target by the end of next year.

"While we can be confident about the direction of change of inflation over the coming months, we remain uncertain about the precise pace and extent of the drop in inflation. It could fall back more slowly if companies attempt to restore profit margins by raising their prices, but it is also possible that inflation could fall back more sharply given the existing margin of spare capacity in the economy, the substantial risks around the global economic recovery and the implications of a further slowdown in the world economy for the United Kingdom."

According to the official figures, falls in the price of food, air transport and fuel helped to slice off .2% of inflation in the last month.

Meanwhile, MPs are set to debate a motion later, which urges the government to limit increases in the price of petrol. The government plans to increase fuel duty by 3p a litre in January, but this is likely to reverse the fall in the inflation rate.

(DW)

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