BoE: inflation could fall back in April

LONDON, January 17, Reuters -- British consumer price inflation is poised to hit a 30 year high of 6% or more in April, but the big question for the Bank of England and the wider public is how quickly it will fall back.

The BoE was the world's first major central bank to raise interest rates last month since the coronavirus epidemic hammered the global economy.

In 2022 investors are betting on as many as four more rate hikes, with the Bank Rate as high as 1.25%, because of the rise in prices in Britain - as in many other rich economies - looking set to be less transitory than previously hoped.

The inflation peak will affect consumers' spending power as they face a tax hike in April, challenging Britain's economic recovery from the coronaviruses crash of 2020.

Bethany Beckett, an economist with Capital Economics, said household disposable income will fall in real terms this year, leading to a slowdown in economic growth to 3.7% in 2022. In November, the BoE predicted 5.0% growth this year.

Consumer price inflation is expected to be 3.5% in 2022, before falling to 2.25% in 2023, close to the BoE's 2% target in November.

The central bank raised its estimate for inflation to be around 6% in April after gas prices went up further.

The BoE is likely to push up its full-year inflation forecasts on February 3, along with what many investors think will be another rise in the Bank Rate to 0.5%.

Households are facing a huge increase in gas bills by 50% if the government moves to lessen the hit in April, when a regulated price cap is due to be increased.

According to Paul Dales, chief UK economist at consultancy Capital Economics, has nearly doubled his inflation forecast for 2022, to 4.0% from a previous estimate of 2.2%.

After their surge, gas prices have fallen recently.

Britain is poised to receive a record number of liquefied natural gas cargoes this month, helping to bring the day-ahead natural gas price down from a peak of more than 450 pence a therm in late December to around 200 pence a year ago, although that was still much higher than its level of about 50 pence a year ago.

Philip Shaw, an economist with bank Investec, said that inflation could end up at 2.5% in 2022 if the recent fall in gas prices continues and will lead to a reduction in tariffs at a twice-yearly review by regulators in October.

As well as the usual variables such as petrol prices and the impact of weather of food costs, another key factor for inflation this year is what happens to global supply chains, which were hit hard by the Pandemic.

This has been seen most starkly in the car market, where a shortage of microchips has curtailed production of new cars, pushing the price of second-hand models up by 27%.

A survey of purchasing managers at British manufacturers last month showed an easing of prices for inputs from near record highs.

Analysts are watching the impact of the Omicron variant in China, where a strict approach to stamping out coronavirus outbreaks led to the shutdown of suppliers vital for global manufacturers in 2020, pushing up prices.

The BoE's main concern is not so much about what inflation does in the coming months, but rather whether it causes longer-term inflationary pressures, principally in wage settlements.

Some companies have responded to a post-COVID shortage of workers by pushing up pay for some positions.

Food retailer Gregg's GRG.L has brought in a pay rise for its staff. A survey of manufacturers showed recent pay increases between 2% and 3% but went as high as 14% in some cases, while 45% of firms had yet to agree a pay deal due to uncertainty and other factors.