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Big rise in inflation and heartfelt apologies from Mr King

Look away now if you are of a nervous disposition. Latest figures from the ONS this morning show that CPI annual inflation reached 4.5% in April, up from 4.0% in March. The only time CPI inflation was higher than this was in September 2008 when it reached 5.2% which was a record high. The RPI figure came in at 5.3% and was slightly down from the 5.4% recorded in March.

The recent trend in UK inflation can be seen below.

Source: ONS

The main contributors to the increase this month were transport, especially air transport, although this was partly due to the timing of Easter this year; and, alcoholic beverages and tobacco which rose by a record 5.3% between March and April, although this was compounded by a rise in excise duty.

We seem to have had a stream of bad news over the past week. Last Thursday, Mervyn King, governor of the Bank of England, told us that “there is no doubt that we are facing a difficult time ahead” at his quarterly inflation report briefing. He noted that the Bank is expecting gas bills to rise by 15% this year and electricity bills to go up by 10% with the result that inflation is predicted to rise to 5%. Well, we’re nearly there already, so it doesn’t take that much of a prediction.

Latest figures released yesterday show that inflation is rising in the Euro area, reaching 2.8% in April from 2.7% in March. For the whole of the EU, inflation was at 3.2% in April compared to 3.1% in March. But, this is still well below the UK figure.

Also, on Friday, the NIESR economic think tank, estimated that UK economic growth had slowed to 0.3% in the three months to April, compared to 0.5% in March, although they do not anticipate a ‘double dip’ recession.

Mervyn King noted in his talk the fact that the Bank’s forecasting record was not worth the paper it was printed on, although he didn’t use those exact words. He said: “A year ago, we thought that growth in the fourth quarter of 2010 and the first quarter of 2011 would be 1.5%. That hasn’t happened. What we have seen is a soft patch.”

I suppose one man’s ‘soft patch’ is another man’s quicksand, and much of the economy is up to its neck in it, just as Mr King is full of it. Latest figures from Europe show that Germany grew by an impressive 1.5% in the first quarter of 2011, with even the French recording 1.0% growth.

So it is just us then! Although having said that, we do have the company of the other basket cases in Europe such as Greece and Portugal. I’m not even going to mention the figures just released that show that UK manufacturing output only increased by 0.2% in March. Whoops, too late.

Mr King said that he expected growth to bounce back next year, driven by a stronger trade performance and a resurgence in business investment. Not that he’s got anything to go on mind you, but it does make for a pleasant fantasy. This time next year he’ll be able to explain why he was wrong.

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Posted in Bank of England, Consumer Price Index, economic growth, Monetary Policy Committee

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