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Inflation hits five-year high but Bank of England spared letter blow

Mark Carney: spared his first public letter explaining soaring prices: Adrian Dennis/PA
Mark Carney: spared his first public letter explaining soaring prices: Adrian Dennis/PA

Inflation hit a five-year high of 3% today but Bank of England Governor Mark Carney narrowly avoided writing a letter to the Chancellor to explain soaring prices.

Rising food bills, higher petrol costs and more-expensive computer games pushed the Consumer Prices Index to the highest since April 2012, intensifying the squeeze on households at a time when wage growth is nearer 2%.

The pound’s post-Brexit slump is behind the rise but Carney was spared his first public letter explaining an overshoot as the CPI has to hit 3.1% or higher for the Canadian to get his pen out and write to Philip Hammond. That looks more likely next month, when inflation peaks at around 3.2%, according to Capital Economics’ forecasts.

The rise in the CPI was in line with expectations but the figures also showed “core” inflation, stripping out erratics, sticking at a near-six-year high of 2.7%.

That is likely to confirm the Bank’s monetary policy committee in its resolution to press ahead with the first interest rate rise since 2007 early next month, taking borrowing costs from their record low 0.25% to 0.5%.

ING economist James Smith said: “Whilst we think a November rate hike is highly likely, for now we think the lack of domestically generated inflation combined with a sluggish growth outlook — and don’t forget all the noise surrounding Brexit — mean that any subsequent tightening is likely to be very limited.”

The pound fell slightly following the figures, down 0.27 cent to $1.3258, as the figures held few surprises for City dealing desks.

Anthony Kurukgy, senior sales trader at Foenix Partners, said: “Carney’s credibility now appears to be on the line and boxed in by his own rhetoric... to back off now would drive the currency down and send the notoriously flip-flop central bank back to square one.”