Bank Of England Helpless As Inflation Marches Ahead.

A change in the method of calculating inflation has resulted in the Consumer Price Index [CPI] jumping up to 2.5% for the month of February as compared to 2.2%, which was recorded in January. The new method, which involves calculating the increases immediately instead of the earlier 4 month delay has resulted in the increased electricity and energy bills being factored in immediately and has thus maintained the inflation at a higher level than the 2%, which was targeted by the Bank of England.

The increased level of inflation has restricted the Bank of England from reducing its interest rates and even though the US Federal Reserve has made a drastic cut in the US interest rates, it seems unlikely that the Bank of England will follow suit and would rather prefer to wait and watch for another month or two at least before making any reductions. However, Howard Archer, the Global Insight economist, feels that the Bank Of England might have to reduce the interest rate in April itself in case of continuation of tight liquidity and if the rates maintained its rise in the money market. But the slowing down of the economy and the highest inflation rate since the last 9 months does not bode well for ordinary Britons, already under pressure from rising mortgage payments and fuel prices. The Office for National Statistics, which calculates the consumer price index has said that the higher inflation rate was expected and that the new method of calculating the increased energy prices instead of waiting for 4 months was the main reason behind the jump as compared to the previous month and that the index would have remained at 2.2% if the new methods of calculations were not factored in.

The energy and fuel price increases have also been accompanied by a steep rise of 17.6% in food prices such as bread, milk and cheese, which incidentally is the highest rise in the last 10 years. However, the prices of some fruits and vegetables including strawberries recorded a fall. However, as Mr. Darling's tax increases kicked in, the rates of Cigarettes and Liquor have increased. Many analysts believe that the continuous rise in fuel and food bills could push the inflation level above 3% in the coming months. The Retail Price Index, which also includes the cost of housing, has remained steady at 4.1% as compared to January. Mr. Malcolm Barr, economist with J P Morgan said that based on the current data the Bank Of England should reduce the interest rates and that the continuous downturn in the global financial market has impaired growth and fueled inflation. In addition to the global credit crunch and the ripple effect of the US economy, the continuous rises in the price of crude oil, currently at 111 dollars to the barrel, has translated into a retail price of 104p per liter of petrol and this has also prevented the inflation levels from climbing down. There are, however, some investors who say that the Bank Of England will have to decrease the interest rates by another 100 basis points by the end of the current year if it wants to prop up the economy even as the credit crisis increases.

With crude, food and energy prices going up and property prices going down, the government seems to be in a dilemma as to the route to be taken to stabilize the economy and keep inflation under control. At present, though it seems to be fighting a losing battle and with many factors such as the falling US economy and the rising prices of crude outside its control, there does not seem much that the Bank Of England can do but to watch the situation in the short term.