Carney to Put Pen to Paper as U.K. Inflation Climbs Above 3%

(Bloomberg) -- U.K. inflation unexpectedly accelerated to the fastest in more than 5 1/2 years in November, which will force Bank of England Governor Mark Carney to explain why price growth is so far above his policy target.

The 3.1 percent rate was stronger than economists had forecast and the highest since March 2012. The Office for National Statistics said on Tuesday that the increase was driven by the cost of air fares and computer games.

Carney to Put Pen to Paper as U.K. Inflation Climbs Above 3%

While inflation -- boosted this year by the pound’s decline after the 2016 Brexit vote -- is forecast to slow in 2018, what matters for Carney will be the development of domestic price pressures. The BOE increased its benchmark interest rate last month for the first time in a decade, saying low unemployment and a squeeze on supply could fuel faster wage growth.

The latest data mean Carney has to write to Chancellor of the Exchequer Philip Hammond explaining why inflation is more than 1 percentage point away from the official 2 percent target. The letter will be published alongside the BOE’s policy decision in February, rather than this week, as the Monetary Policy Committee has already started its meetings for its Dec. 14 announcement.

Markets expect no further rate increases until late 2018, a view echoed in a survey of economists published Tuesday. Bloomberg Economics sees the benchmark, currently at 0.5 percent, staying on hold for all of next year.

What Our Economists Say:

“Inflation bounced higher in November, but only because of the extremely volatile price of flights. The Bank of England won’t lose much sleep over it. The governor was expecting to write a letter of explanation to the chancellor at some point and the story is simple. Inflation is peaking, it’s set to fall back toward the 2 percent target next year and action has been taken to help it stay there.”

--Dan Hanson and Jamie Murray, Bloomberg Economics. More here: U.K. React

While some BOE officials say they are seeing early signs of a pickup in wage growth, a report on Tuesday offered a gloomier assessment, predicting that pay increases will fall short of inflation again. Recruitment firm Korn Ferry said Britons’ real wages will drop 0.5 percent next year, lagging behind a global average of a 1.5 percent gain.

The ONS data showed that core inflation, which excludes volatile food and energy prices, was unchanged at 2.7 percent in November, also the highest since 2012.

Upward pressure on inflation last month came from the price of computer games and air fares falling less than they did a year earlier, as well as fuel prices, the ONS said. Higher chocolate prices boosted food and non-alcoholic drinks.

Downward pressure came from computer equipment, while clothing and footwear costs rose more slowly than a year earlier.

Oil prices have gained, and the effect was seen in factory input prices, which rose 1.8 percent, the most in three months. There could be further pressure in December after disruptions to a key North Sea pipeline sent crude prices to their highest in 2 1/2 years.

Input prices are up 7.3 percent from a year earlier but competition has forced manufacturers to absorb some of pressure, with output prices increasing just 3 percent over the same period.

©2017 Bloomberg L.P.