Inflation at 2.9%: What the analysts think

By THIS IS MONEY
Updated:

 

Shock figures today showed inflation in December rose to an greater-than-expected 2.9%. We round up what the the economists say...

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DAVID PAGE, INVESTEC SECURITIES

'Next month's reading will include the impact of the VAT rate rise. This is likely to push inflation to around 3.5% in January. Today's inflation number provides a rare glimpse at inflation undistorted by VAT changes and shows that inflation has been more persistent in the UK than expected given the scale of economic downturn.

As we look ahead, inflation numbers will appear more subdued. The fact that UK inflation has proven so resilient in the face of the worst economic and financial crisis since the Second World War has been a surprise, but one that we think reflects a sharp depreciation in sterling and a faster than anticipated rebound in oil and other commodity prices.

Judging the right time to tighten monetary policy will be incredibly difficult. However, in the light of today's number, we maintain our view that the MPC will start to raise the Bank Rate gently from around the middle of this year.'

JAMES HUGHES, CHIEF ECONOMIST, BLACK SWAN CAPITAL

'We're about to enter a nasty stage of the recovery when inflation could easily move into double digit figures. The already inflationary effects of weak sterling will soon be amplified by rising commodity and energy prices triggered by growing demand in the Asian economies.

The convergence of weak sterling and rising commodity prices will be brutal for the UK economy in the short to medium term. But we'll have to go through this period of high inflation in order to recover.'

TED SCOTT, DIRECTOR OF UK EQUITY STRATEGY, F&C Investments

'Today's inflation data has added to those fears that the first rise in official interest rates may come sooner rather than later. Some commentators have argued that a rise in rates is unlikely before 2012 but this now seems increasingly unlikely.

Another feature of economic markets so far this year has been the rally in sterling and the inflation data has led to further strength in the pound as the market anticipates an earlier rise in rates.'

JONATHAN LOYNES, CHIEF EUROPEAN ECONOMIST AT CAPITAL ECONOMICS

The higher-than-expected figures should not throw Bank of England rate-setters into 'a blind panic' - although he added that 'nerves will be sorely tested over the next few months'.

'We still think that the impact of the recession and the vast amount of spare capacity created will eventually bear down strongly on underlying price pressures'

MATTEO REGESTA, BNP PARIBAS STRATEGIST

On the swap markets that predict interest rates:

'The data has really crushed the market The market is now pricing in a 25 basis point rise in UK interest rates by August.'

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