LONDON (MNI) – The Bank of England has been expecting high near
term inflation, and as long as February CPI comes in comfortably below
the 3.5% outturn in January this will suggest it is not going to exceed
the BOE forecast.

In its February Inflation Report the BOE predicted CPI would
average 3.3% in Q1 on both flat and unchanged interest rates. The 3.5%
CPI outturn in January entails a couple of 3.2% results in February and
March to put CPI in line with the BOE quarterly projection.

Analysts’ median forecast is for a 3.1% outturn in February,
although the forecast range is wide – from 2.8% to 3.6%.

In a speech Monday, King said the January inflation data made it
more likely that CPI would be in line with the BOE’s central forecast.

King said the January data “showed that inflation had indeed risen.
So it now looks even more likely that inflation in the first quarter of
2010 will be close to the middle of the MPC’s fan chart.”

Back in its November Inflation Report, the BOE forecast inflation
would average 2.71% in Q1. Central bank officials attribute the sharp
rise in their forecast to petrol price increases and the impact of the
rise in value added tax from 15% to 17.5%, which kicked in in January
but which will be felt in February as well.

At the February Inflation Report Press Conference BOE Governor
Mervyn King said: “our Agents, when talking to business contacts around
the country have come to the judgement … that somewhat more of the
increase in VAT back up to 17.5% will be passed through in prices at the
beginning of this year than we had previously assumed.”

The January BOE Agents Report revealed that when business contacts
were asked about passing through the VAT rise into prices 83% planned to
pass through at least a part of it, and 46% planned to pass it through
in full.

The BOE survey suggests retailers have been readier to respond to a
VAT hike to a cut.

A study by the Office for National Statistics on the impact of the
temporary reduction in VAT from 17.5% to 15% from Dec 1, 2008 estimated
it reduced the 12-month CPI rate by around 0.5 percentage point.

That survey found 66% of shops passed on the VAT cut, compared to
the 83% of survey respondents the BOE found saying they will pass on the
hike. The ONS said if the VAT cut had been passed on in full it would
have knocked 1.5 percentage points off the 12-month CPI rate.

The ONS survey on the cut found its impact was fleeting, with 36%
of prices cut in December back up at pre-VAT reduction levels by
February.

The ONS will not give a numerical estimate of the impact of the VAT
hike when it publishes the February consumer price data. Estimating the
impact is tricky and the ONS has said it will only issue its results in
April.

The February inflation data will be published at 0930GMT Tuesday.

–London Bureau; Tel: +442076341624; e-mail:
drobinson@marketnews.com/drobinson@marketnews.com

[TOPICS: M$$BE$,M$B$$$.MABDS$]