Bank set to downgrade economic growth forecasts AGAIN as inflation eats away at household spending power

The outlook for the UK economy looks set to take another dent tomorrow, with the Bank of England expected to forecast a grim combination of stagnant growth and persistent inflation.
Sir Mervyn King will present the Bank's quarterly Inflation Report after official figures today confirmed inflation remained at 2.7 per cent in January.
The Bank's monetary policy committee gave a clue to the report's forecasts last week when it warned that inflation was likely rise in the coming months and might remain above the 2 per cent target for another two years.

Price shock: Inflation remains above target but it is everyday essentials such as food and heating that is rising most quickly.

The attack from rising prices on UK households' income and savings has squeezed spending power for the last three or four years as salaries have been frozen and savings rates slashed.

Consumer prices index inflation has been at 2.7 per cent since October but today's data revealed households have suffered faster rises among essential items such as energy, food and rent.

The Office for National Statistics added that inflation as measured by the retail prices index had accelerated to 3.3 per cent from 3.1 per cent a month before.

And experts predict energy price hikes, rising food prices and tuition fees could push CPI above 3 per cent by the summer.

Inflation is also being driven higher by the weaker pound, according to Howard Archer, chief UK and European economist at IHS Global Insight.

He said: 'Once again the Bank of England will likely have the dismal task of raising its consumer price inflation forecasts and cutting its gross domestic product growth projections.'

The Bank is likely to admit it was overly optimistic in its November report, when it said inflation would fall back towards target in the second half of 2013.

Its forecast for 0.5 per cent growth in 2012 has already been proven wrong after a worse-than-expected 0.3 per cent decline in fourth quarter GDP left the economy unchanged overall last year.

The contraction - which left the UK on the brink of an unprecedented triple-dip recession - is likely to see the Bank trim its forecasts for 2013. It downgraded its 2013 growth forecast to around 1 per cent in November, but could bring this down yet again.

Graph shows CPI and RPI for the past two years - the rate of price rises has been stuck for four months.

Today's inflation figures from the ONS showed prices overall were actually 0.5 per cent lower in January than December - but the change between the months was the same as for the year before, so the annual rate of inflation remained constant.
Prices of clothing and footwear dropped by 5.4 per cent as retailers discounted item after Christmas. The fall was quicker than occurred last year and pushed the overall rate lower.

Conversely, alcohol and tobacco prices rose 4.3 per cent over the month. The ONS said this was because retailers reversed discounts on booze that had been in place in the run up to Christmas.

A shortage of vegetables in the UK contributed to the food price rises as more produce was sourced overseas.

Stubbornly high inflation is causing problems for policymakers as they also weigh up the risks to the economic outlook.
The Bank held off from more money printing measures last week, keeping its quantitative easing programme at £375 billion, while it also kept interest rates at 0.5 per cent.

Vicky Redwood, chief UK economist at Capital Economics, said there could be more QE in the pipeline after the MPC said it was prepared to 'look through' the inflationary pressures.

She said: 'If the economy continues to struggle, above-target inflation should not be a barrier to further stimulus. What's more, we still expect inflation to fall back towards the end of this year as underlying price pressures fade further.'

The ONS also supplied analysis of the items that had had most impact on the rate of inflation over the past year.
The biggest contributors to inflation in January included everyday essentials such as home fuel bills, rents and food.
Prices in the 'housing and household services' category rose 3.5 per cent in the year to January with the rise split between higher rents for tenants and home fuel bills. This category contributed 0.5 of the overall 2.7 per cent rise in the CPI.
The figures did not include the impact of price rises from energy suppliers that were announced  around the turn of the year. The hikes will push inflation higher when households begin to receive bills for the winter period.
A similar upward contribution came from 'food and non-alcoholic beverages'.
Prices here rose 4.2 per cent over the year. Alcohol and tobacco prices roses even more quickly, at 8.5 per cent. The ONS said that food bills have been impacted in the past few month by low vegetable stocks, with a shortage of many items pushing prices up.