BoE's King says VAT hike to blame for inflation rise
Inflation would be below the Government's 2% target if it was not for the increase in VAT earlier this year and rising energy and import prices, Bank of England Governor Sir Mervyn King said yesterday.
In a letter to Chancellor George Osborne, Sir Mervyn claimed the factors were forcing up CPI inflation - which reached 4.4% in July - and reiterated the bank's belief that the rate will hit 5% later this year before pulling back.
The governor is required to write to the Chancellor if CPI inflation is more than 1% higher than its 2% target three months after his last correspondence.
In his seventh successive letter of explanation, and 12th in total, Sir Mervyn said high inflation reflected "the increase in VAT to 20% and past increases in global energy prices and import prices".
He added: "Although it is impossible to identify the effects of those factors with precision, it is likely that inflation would be below target in their absence."
The governor said inflation will be driven up by increases in utility bills and the continued effect of VAT and commodity prices.
Sir Mervyn said the biggest risks facing the UK economy came from overseas.
But with the UK facing a period of continued sluggish growth, the bank expects inflation to fall below the 2% target to 1.8% in two years' time.
July's inflation figures revealed clothing and footwear increased by 3.1% on an annual rate, while housing, water, electricity, gas and other fuels increased by 4.6% on an annual basis.