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King may write inflation letter next week, says New Star

New Star chief economist Simon Ward believes Bank of England governor Mervyn King could have to write a letter to the Chancellor next week over inflation.

He says: “May consumer prices figures are published on Tuesday but King will already know whether the annual increase reached the 3.1 per cent letter-writing level. Recent news suggests it did, which may explain the lack of any discussion of monetary policy in Mr. King’s speech to the British Bankers Association this week.

Ward points out that producer output prices accelerated further in May but the aggregate PPI is not generally a good short-term guide to CPI movements.

“However, the PPI food component correlates closely with consumer prices of processed food and showed a further large rise last month. If reflected in the CPI, this would add an estimated 0.12 percentage points to the annual increase – sufficient to reach 3.1 per cent assuming no other changes.

Ward says that energy prices will have a further upward effect. Electricity and gas prices fell by 2.1 per cent in May 2007 but should have been stable this May, adding 0.07 percentage points to CPI inflation.

“Meanwhile, the price of unleaded petrol rose by 4.5 pence per litre against a 3.1 pence increase last May, according to the AA, suggesting a further boost of 0.04 pp.

“Recent sterling weakness is another possible source of upward pressure. Manufactured import prices rose a further 2 per cent in April to stand 7 per cent above their level in the fourth quarter of 2007.

Ward added: “A 3.1 per cent CPI reading is not a done deal – “core” inflation jumped sharply in April and may partially retrace the increase in May. It would be surprising if the decline were sufficient to offset the above upward effects, however.”

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