LONDON The spike in UK inflation rate largely reflects
temporary effects and should moderate once the impact of these start to
wane, Bank of England Chief Economist Spencer Dale states.

In the foreword to the BOE’s latest Quarterly Bulletin, Dale adds
that – if the CPI surge causes inflation expectations to rise there is a
risk inflation may stay higher for longer.

The BOE believes the financial crisis is likely to have affected
the performance of the wider economy, with one of the key questions
for the BOE’s Monetary Policy Committee being the impact of the
crisis on the supply potential of the economy.

“This is an important question for the Monetary Policy Committee
since the degree of spare capacity in the economy is an important
determinant of companies’ costs and their pricing decisions.”

While the crisis has obviously opened up some degree of spare
capacity, quantifying the precise amount is tricky, Dale says.
Resolving it will be crucial to the future path of inflation:

“…it seems clear that some degree of spare capacity has
emerged – output has fallen substantially and unemployment has risen.
This spare capacity should pull down on inflation. But inflation has
increased sharply since the autumn of 2009. That in part reflects the
temporary effects from a number of factors, including the restoration of
the standard rate of VAT to 17.5%, higher oil prices and the past
depreciation of sterling.”

“As these temporary effects subside, inflation should fall back,
consistent with households’ longer-term inflation expectations… but a
more prolonged period of above-target inflation could increase the risk
that inflation expectations might rise.”

The UK economy’s recovery will pick-up pace over the next year,
according to Dale.

The financial crisis has entered a “new phase” over the last three
months, Dale warns, as investor nervousness about the sovereign debt
crisis has led to heightened volatility in financial markets.

–London newsroom: 4420 78627492; email: william.wilkes@ntkn.com/
ukeditorial@marketnews.com
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