Investors are increasingly worried about inflation overshooting the Bank of England’s target, according to the Bank for International Settlements.
The Switzerland-based body said that financial markets were more concerned now about inflation in Britain than in the US or the euro area.
“Although a non-trivial part of this increase was due to the recent VAT hike, the heightened near-term uncertainty may suggest investor wariness of a persistent overshoot of the 2 per cent CPI inflation target,” the BIS said in its quarterly report.
News of the slide in fourth-quarter economic output “further complicated” the outlook for monetary policy, the BIS added.
The analysis from the BIS, which acts as banker to the world’s central banks, came after the UK’s consumer prices index rose an annual 4 per cent in February, double the target. The persistent overshoots have led to accusations that the Bank is losing credibility and prompted deep divisions over rates on its policy committee.
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A separate survey of manufacturers and services companies suggested that, in Britain at least, most businesses are braced for rising prices. According to the accountants KPMG, manufacturers are predicting the sharpest increases since the survey began eight years ago. Service companies are planning to lift prices at the strongest pace since October 2007. The figures come amid rising confidence among businesses, according to the survey of 1,300 firms. It showed that 68 per cent of factories expect activity to rise in the next year. Only 8 per cent forecast a fall. The balance of 60.4 is the highest since the data started in June 2002. The report suggested that firms were expecting to increase employment, although the rate of job creation among manufacturers slipped to the lowest since October 2009.
Malcolm Edge, head of UK markets at KPMG, said that while businesses were preparing for growth, there were still uncertainties. “Interest rates are likely to rise, oil prices are high and heading upwards, and the impact of Middle Eastern unrest of international trade flows is hard to call,” he said.