The Governor of the Bank of England (BoE), Mervyn King, has again written to the Chancellor of the Exchequer, Alistair Darling, following the recent announcement that inflation increased to 4.7% in August from 4.4% in July.

This was the second consecutive month that the rate of inflation was more than double the 2% target set by the Government. For every three months that inflation is above 3%, King must write to the Chancellor to explain why inflation is beyond the target and what is being done to lower it.

King explained that the sharp rise in inflation over the last year had been due to a number of factors including food, oil and energy prices increasing by +13%, +20% and +25% respectively and a -15% fall in the sterling since its peak last July. The Governor said that he now expects inflation to peak at 5%. He went on to say that the UK needs a period of ‘muted economic growth’ to reduce pressure on prices and wages and therefore return inflation back towards its target.

Jamie Dannhauser, economist with Lombard Street Research, told PIN: “I generally agree with the forecast of a 5% peak made by the BoE. I would expect it to peak at 5.2% in September or October 2008. Where I differ from the BoE is that I expect a sharper downswing next year. In Q1 2009 I believe that inflation will remain around 4% but that it will then fall quickly throughout the rest of the year reaching 1.5% by December. The BoE has inflation falling to 2% over the same period.”