CPI inflation rose to an annual 3.2% in October, above the Bloomberg consensus forecast of 3.1% but below the 3.3-3.4% suggested in a post a fortnight ago.

The favourable surprise relative to that projection partly reflected a fall in food inflation from 4.9% to 4.2% as fresh food prices increased by less than a year earlier. This is likely to prove temporary, with recent increases in global commodity costs suggesting a rising trend into early 2011, allowing for the normal lag – see chart.

As expected, higher fuel costs added 0.1 percentage points to the CPI headline rate. Services inflation, meanwhile, firmed from 3.7% to 3.8%, mainly as a result of year-earlier reductions in bank overdraft charges and mortgage arrangement fees falling from the calculation.

With little news in today's report, CPI inflation still appears likely to rise to about 4% by early 2011, reflecting high VAT pass-through, food and energy cost increases and stable "core" pressures. The Bank of England last week revised up its central projection for the first quarter to about 3.5% from 3.0% in the August Inflation Report.

Governor King's latest exculpatory letter was accepted uncritically by a Chancellor keen to leave the door wide open to "QE2". The "temporary shocks" defence, however, is wearing thin. Commodity price gains are partly the consequence of a secular rise in demand for raw materials from emerging economies, a trend the MPC has consistently ignored. Similarly, exchange rate weakness has not been imposed on the UK but partly reflects the MPC’s policy choices. The scale of the recent fall is no guarantee that it will not be repeated. The effective rate had also declined by 20% over three years at the end of 1974 but plunged a further 25% over the following two years.

The extent, moreover, to which such “shocks” pass through to inflation, instead of being absorbed by a reduction in profit margins or nominal wages, depends on the stance of monetary policy and its impact on inflationary expectations. A high degree of pass-through is prima facie evidence that monetary conditions are too loose and that the inflation target is failing to anchor expectations, with firms confident that price hikes will not cause them to lose market share because the MPC will tolerate a general rise in inflation.