Sterling slumps as inflation surges to a 16-year record
Today’s Bank of England quarterly report will slash UK economic growth forecasts
A surge in inflation sent sterling tumbling to a 21-month low yesterday as City economists warned that the chances of recession are increasing.
Consumer price inflation (CPI) jumped by 4.4 per cent in the year to July, fuelled by rocketing food and oil costs, official government data revealed yesterday. This is more than double the two per cent target and comes ahead of today’s eagerly awaited Inflation Report from the Bank of England.
The retail price excluding interest payments (RPIX) measure of inflation, seen as a more accurate guide to living costs, soared by an even more devastating 5.4 per cent.
The 0.8 per cent month-on-month rise in food prices was the single largest surprise, reflecting higher meat and bread prices. Annual food price inflation is now running at 12.3 per cent.
“We have changed our view on UK growth and believe the economy is presently in recession,” said George Buckley, chief UK economist at Deutsche Bank. He is now forecasting growth below zero in both the third and fourth quarters of this year.
Unless inflation slows to three per cent in August, BoE governor Mervyn King will have to write his third letter to the government setting out how he plans to return inflation to target.
The gloomy data comes ahead of today’s quarterly inflation report from the Bank of England which is expected to show sharply lower growth forecasts for the UK and significantly higher projected inflation.
In its last report in May the central bank predicted that growth would slow to a one per cent annual pace in the first quarter of 2009, the weakest since 1992, with King warning there could be “an odd quarter or two of negative growth.” Today’s verdict is likely to be even grimmer.
The pound, which in the past month has fallen six per cent against the US dollar, yesterday hit a 21 month low of 1.90 against the greenback as markets moved to price in the gloomy economic outlook.