Red faces at Bank of England as inflation forecast misses mark

There was some good news for Bank of England governor Mark Carney on Tuesday, as the UK's inflation rate unexpectedly stuck at its five-year peak of 3 per cent. Had the figure risen to 3.1 per cent, as most City economists expected, Carney would have been obliged to write an open letter to the chancellor, Philip Hammond, explaining why the cost of living was so far adrift of the government's 2 per cent target.

But there was bad news for the governor too. While Carney has been spared the task of penning an explanatory letter on inflation, he’ll have to spend more time defending the central bank’s shaky record on forecasting – and its decision earlier this month to raise interest rates for the first time in more than 10 years.

Just a fortnight ago, when it raised rates by a quarter of a point from their all-time low of 0.25 per cent, the bank said it expected inflation to break through 3 per cent in October, possibly to 3.2 per cent.

So imagine the City’s surprise yesterday morning when the figure, as measured by the Consumer Prices Index, turned out to be the same again as September’s 3 per cent.

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"Red faces all round as UK inflation fails to rise as widely expected – not least by the Bank of England," was how IHS Markit's chief economist Chris Williamson put it.

For consumers, the inflation data also contains both good and bad news. The good news is that the Brexit-inspired surge in the cost of living since last year’s referendum – on the back of the fall in the value of the pound – may just have reached its peak. And the immediate post-referendum currency effect will start to work its way out of the inflation calculations by the end of the year.

Falls in the price of fuel and furniture helped to limit the overall increase in inflation last month. But the bad news for shoppers is that food prices are rising at their fastest rate for more than four years – by 4.1 per cent over the past year – taking them to their highest level since September 2013.

The increases were particularly marked in fruit and vegetables, in fish, meat and dairy, raising the prospect of far more expensive festive fare this Christmas, leaving even less for shoppers to spend on non-essential gifts and treats.

As Stephen Clarke of the Resolution Foundation pointed out, this hurts poorer households hardest, as they spend a far larger proportion of their incomes on essential items such as food.

Unions renewed their demands for something to be done to help the millions of households struggling to survive the squeeze. With chancellor Philip Hammond due to deliver his budget next week, the TUC’s Frances O’Grady urged the government to “stop turning a blind eye to Britain’s cost of living crisis. Household budgets are being stretched to breaking point”, she said.

Green light for Tesco deal

Inflation wasn't the only surprise in the City yesterday, with retail analysts also caught on the hop by the competition regulator's decision to grant provisional clearance to Tesco in its £3.7 billion (€4.13 billion) bid for cash-and-carry group Booker.

Tesco's bid for Booker has been controversial from the start. Even before it was launched in January, it saw the resignation of Tesco's senior non-executive director Richard Cousins, who was opposed to the deal. Some Tesco shareholders have also voiced their concern at the price being paid.

The multibillion pound Booker move has raised fears among retail experts that it might distract the management team at Britain’s biggest retailer from their primary task of revitalising the core UK supermarkets operation.

Tesco’s sheer size – it still has just under 30 per cent of the UK grocery market – had led most sector experts to expect some conditions would be imposed before the deal would be allowed to proceed. The most likely options were for Tesco to be ordered to sell off its 1,000-strong Tesco Express network or its One Stop convenience stores chain.

In the end, the competition and markets authority has made no such demands, instead saying it believes that competition is strong enough in both the wholesale and retail grocery sectors to protect customers from higher prices or reduced service.

Rival wholesalers and independent store operators have warned the deal could force them out of business. They still have a few weeks to redouble their protests before the competition authority makes its final decision next month. But, barring any serious unrest from Tesco shareholders, or investors in Booker, it looks as though the deal is in the bag for chief executive Dave Lewis and his team.

Fiona Walsh is business editor of theguardian.com