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Bank of England Governor Mark Carney will have to write a letter to Britain’s Treasury chief explaining why inflation in the country is running by more than a percentage point above target after official figures showed it unexpectedly rising to 3.1%.

The rate for November, published today, is the highest since March 2012 and above most economists’ forecasts for a modest decline to 2.9% from the previous month’s 3%.

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Because inflation is more than a percentage point above the bank’s 2% target, Carney has to explain to Chancellor of the Exchequer Philip Hammond what he and his colleagues on the rate-setting Monetary Policy Committee are doing about getting inflation down. A Bank of England spokesperson says the letter won’t be published until the February meeting of the nine-member panel, by which time many economists expect inflation to have eased.

In November, pre-empting a potential explanatory letter, the Bank of England raised its main interest rate by a quarter-point to 0.5%, its first hike in a decade. Though the hike was fairly small, policymakers will be hoping it helps to dampen down inflation by nudging up the cost of loans and mortgages.

Read: Global economy has ‘room to run’ in 2018: BlackRock

According to Britain’s statistics agency, the main driver behind inflation in November was the fact that airfares fell by less than they had a year ago. It also says prices of recreational and cultural goods and services, most notably computer games, also had an upward effect.

Inflation’s sharp rise over the past year or so is directly related to Britain’s vote in June 2016 to leave the European Union. That decision prompted a sharp 15% fall in the pound, which raised the cost of imported goods, notably food and oil.

Largely because that currency impact is a one-off, there are hopes that inflation will start to moderate in the coming months. That’s something that the Bank of England has indicated, too, in its quarterly economic projections.

Read: BoC holds overnight rate target, with hint of future hikes

However, there have been some signs recently that firms, many of which held off from passing on to customers the uptick in their costs, are now raising prices. That is creating a second wave of inflation that will cement expectations of higher inflation among the British. That, in turn, could prompt the Bank of England to raise interest rates again next year — not ideal for the economy when it is struggling with the uncertainties of Brexit and real household incomes are falling as price rises outstrip wage increases.

“It’s quite possible that inflation is now close to its peak,” says Lucy O’Carroll, chief economist at Aberdeen Standard Investments. “But some of the latest surveys suggest that service sector costs and prices are rising. Given how dominant services are in the economy, this could feed through to inflation overall.”

The Bank of England’s rate-setting body meets again on Thursday. Few, if any, experts think it will raise interest rates then.

Originally published on Advisor.ca
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