Inflation hits 4%

UK Inflation rose to its highest level in two years in January putting more pressure on the Bank of England to raise interest rates.

The UK Consumer Prices Index (CPI) rose to 4%, up from 3.7% in December, as the effects of the VAT rise, higher oils prices and increases in the cost of alcohol, food and furniture fed through.

Rates have now been at least 1% above the bank’s target of 2% for 14 months.

The Retail Prices Index (RPI), which includes mortgage interest payments and is the preferred measure of inflation for wage negotiations, rose from 4.8% to 5.1%.

This was the first CPI December to January rise since records began. Inflation is usually flat after the Christmas period as retailers discount stock in the sales. Despite this, some economists had predicted that inflation would rise to 4.1% in January, so the numbers are little better than had been expected.

Overall inflation was kept at the lower end of expectations as a result of a fall in the price of clothing and recreational purchase like CDs and DVDs.

A statement from the ONS said: “Two of the main factors that had an impact on the January data are the increase in the standard rate of Value Added Tax (VAT) to 20% and the continued increase in the price of crude oil.”

Some commentators have predicted that inflation could rise to 4.5% before it stabilises, making a rise in the base rate likely to come sooner rather than later despite negative data on growth and the jobs market. UK inflation is currently considerably higher than the Euro zone rate which stood at 2.6% in December.

Amit Kara, at UBS, told the BBC: “The [inflation] numbers are broadly in line with market expectations, but the issue for the MPC is that inflation has overshot its target for much of the last 5 years and many are doubting its commitment to the inflation target. Under these circumstances the committee has no choice but to sound hawkish at tomorrow’s inflation report.

“We’re looking for a [third quarter] rate hike but if the economic growth surveys remain good, that could be brought forward.”

Chris Williamson, economist at Markit, told the Financial Times: “The data do nothing to change the dilemma facing the Bank, whereby short-term price pressures are encouraging some members of the monetary policy committee to hike interest rates, but others fear a rate rise will threaten the fragile recovery.”

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Posted in: Inflation