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Jill Kirby: The Bank of England risks missing the return of inflation

Word in the Times today is that Andrew Sentance will remain a lone voice calling for an interest rate rise at this Wednesday's meeting of the Bank of England's monetary policy committee.

Yet signals of inflationary pressure continue to accumulate, suggesting that Sentance's view deserves serious consideration. Last week the OBR sounded confident that the risks of a double dip recession are negligible; Pricewaterhouse Coopers reckon British employers are fast creating jobs in the private sector to replace those lost in the public sector; in any case we are now told that public sector job cuts will be lower than previously forecast.

Today the Engineering Employers Federation says that its members expect demand for new workers to soar; significantly, the EEF also flag up members' concerns about a lack of skilled staff in the job market - which sounds to me like a clear case of wage inflation waiting to happen.

Combine all this with the upward pressure on prices and it's hard to see how the Bank of England can really keep a lid on inflation in the year ahead. In last month's Inflation Report the Bank acknowledged that the prospects for inflation remained "highly uncertain" but asserted that it was likely to fall back in the medium term. However, the Bank's record of consistently underestimating the short term inflation risk suggests that it has been erring on the wrong side of this particular balancing act.

It will be interesting to see what happens on Wednesday. Will the Bank decide to keep interest rates nailed to the floor, reckoning that a dose of inflation is a problem we must be prepared to live with? If so, Britain's savers and pensioners will continue to see their savings erode for a good while yet.


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