LONDON, April 25 - British inflation is likely to creep up over the next two years but will remain in thebottom half of the Bank of England's target corridor, according to a analysts' poll. The median of 23 forecasts in the survey showed annual core inflation averaging 1.8 percent this year before risingto 2.3 percent in 2002, closer to the Bank's target but still below it. The poll was carried out between April 17 and24. In 1997 the Labour government set the bank's Monetary Policy Committee a 2.5 percent target for theRPIX retailprice index which excludes volatile mortgage payments. But the MPC effectively has a corridor of 1.5 to 3.5 percent. Only if inflation falls outside this range does theBank's governor have to write to Chancellor of the Exchequer Gordon Brown to explain why. This possibility arosewhen RPIX hit 1.8 percent in January, the lowest in 25 years. "Overall we still have a very benign inflation scenario with RPIX holding below two percent for most of this yearthen gently gravitating back towards 2.5 percent by the end of next," said Adam Chester, chief economist at theHalifax. "We did have it coming down to 1.5 percent, but that now looks unlikely due to the increase in foodand petrolprices over March and April." In February and March RPIX inflation rose to 1.9 percent year-on-year. The median of 17 forecasts in the poll forthe second quarter was 1.7 percent.
FOOT-AND-MOUTH
When the foot-and-mouth livestock disease hit farming in mid-February, some analysts thought it would be short-lived and have little impact on the economy. But now they believe food prices are likely to rise. RBS Financial Markets has revised up its forecast of the trough in inflation to around 1.7-1.8 percent from 1.5percent. "Retail petrol prices are edging back up and we see gas prices edging up about five percent on averageafter the end of the regulatory price controls this month," said RBS's Ross Walker. Over the last couple of weeks the cost of unleaded petrol has gone up by around two pence per litre. Analysts saythis is only the beginning of an upward trend as retailers attempt to re-establish lost profit margins after a surge ininternational gasoline prices due to a shortage in the United States. Higher petrol prices will offset a two pence per litre fuel duty cut, effective this month, announced by Brown in hisNovember pre-budget statement. Wholesale gas prices have doubled over the past year and analysts predict rises of between five and10 percent inaverage household bills.
PRICE RISE DOES NOT PRECLUDE BOE RATE CUT
"There may be more upward pressure on inflation than people expect," said Walker. "We don't see a huge take-off(but) ... we do take issue with the 'death of inflation' school." But upward price pressure will not preclude a third cut in interest rates this year when the MPC meets in May.Earlier this month it cut rates by 0.25 points to 5.50 percent due to growing evidence a global economic slowdownmay hurt Britain. "There are upward and downward pressures on prices, but the net effect will be inflation close to the 2.5 percenttarget. With growth expected to slow over the course of this year we expect lower UK rates in May,"said Halifax'sChester. Other upward pressures on inflation may come from the dropping out of the equation of a sharp drop in waterprices this time last year and wage inflation. Average earnings rose five percent year-on-year in the three months toFebruary compared with 4.5 percent in January. "Services inflation is quite high ... and what you are seeing is a noticeable pick-up in high-street inflation. I think thattrend will persist," said Richard Jeffrey, director of economics at ING Charterhouse Securities. "Ithink it's unlikelyto go over target, but it could surprise people on the upside."