Inflation will rise faster than expected

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The spectre of inflation will rear its head again this week when the official measure comes off its three year low and the Bank of England warns that prices will rise faster than expected in the coming year.

The key consumer prices index (CPI (Berlin: CEJ.BE - news) ) for October is expected to have reversed its recent fall to rise from 2.2pc in September to 2.5pc, when the Office for National Statistics publishes the figures on Tuesday.

In its three-monthly update on the economic outlook on Wednesday, the Bank will admit that inflation is proving to be more “sticky” than hoped. However, it is expected to sound a more positive note on UK growth than in previous reports.

Philip Shaw, the UK economist at Investec (EUREX: INVF.EX - news) , said October’s inflation figures will have been affected by rising food prices and the tripling in university tuition fees, which will have an impact on the data for the first time. Recent increases in energy bills will feed into the November (Xetra: A0Z24E - news) and December figure, potentially pushing inflation back up towards 3pc.

“We estimate that CPI could reach as high as 3.5pc by mid-2013. If our analysis is correct, it is not surprising that the MPC (KOSDAQ: 050540.KQ - news) decided not to sanction further QE,” he said.

Howard Archer, economist at IHS Global Insight, also expects the Bank to increase its inflation projections “due to the upward pressures coming from increased utility charges, higher food prices and a significant overall move back up in oil prices from their June lows”.

Rising inflation threatens to condemn households to another year of squeezed incomes. The recent easing of pressure on family finances, as wages almost kept pace with prices rises for the first time in over two years, has been hailed as one the bright spots in the economy.

Consumer spending and retail sales have picked up recently because households have felt comparatively richer since inflation started to fall from its peak of 5.2pc in September 2011.

Despite the inflation risks, the Bank is expected to reaffirm its August growth forecasts on Wednesday. The decision to hold its outlook would be a marked improvement on the last three updates, each of which saw sharp downgrades.

In August, the Bank slashed its growth forecast for 2012 to zero, from 0.7pc just three months earlier and 2pc the prior year. It also cut its 2013 forecast to 1.7pc growth from 2.1pc. Mr Shaw said he expected the Bank to show “a stabilisation in the economic outlook”.

The threat of rising inflation poses a fresh risk to the recovery and is thought to have been behind the Bank’s Monetary Policy Committee’s decision last week to vote against more quantitative easing (QE).

The MPC may have been influenced by the Treasury’s decision to reclaim the £35bn of stored interest accumulated through QE, which will have a similar effect to money printing.

But the Treasury’s move, announced on Friday, is small when compared with the £50bn-£60bn the Bank was producing every three months, as the £35bn will be spread across 15 months.