Inflation is likely to remain high throughout 2011 but the Monetary Policy Committee (MPC) is more divided than usual over the reasons why, the Bank of England Governor says.
In his now regular letter to Chancellor George Osborne to explain why inflation remains above the 2% target, Mervyn King said the consumer price index (CPI) will remain at a higher level than expected three months ago, for a period of a year or more.
Annual CPI rose in October to a four-month high of 3.2%, up from 3.1% in September and higher than economists' forecasts.
King blamed the upcoming January hike in VAT to 20% and increases in commodity and other world export prices, which he said have added to companies' costs and so to near-term inflationary pressure.
But he revealed to the Chancellor the range of views amongst Committee members about the weight to attach to each of these risks "is wider than usual". This suggests heated debate within the MPC about how to steer the UK through the economic recovery, including when to start raising interest rates.
King warned the Chancellor more increases in prices for commodities and other imported goods and services would exacerbate the risk of a prolonged period of above-target inflation.
"This may cause inflation expectations to rise, making it more costly to bring inflation down", he writes.
However, he added if the weakness in wage growth continues, once the temporary effects of VAT increases and higher import prices wane, then inflation could move "significantly below" the target.
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