UK inflation rate increases to 4% – Blancer.com Tutorials and projects

The Bank of England will now have to explain how it aims to tackle inflation

The UK Consumer Prices Index (CPI) annual inflation rate rose to 4% in January, up from 3.7% in December, as the effects of the VAT rise were felt.

Retail Prices Index (RPI) inflation – which includes mortgage interest payments – rose to 5.1% from 4.8%.

The CPI figure is the highest since November 2008, and will put pressure on the Bank of England to lift interest rates to curb accelerating inflation.

The CPI measure has now been one percentage point or more above target for 14 months.

The price of petrol as measured by the CPI was £1.27 a litre in January 2011, which the Office for National Statistics said was a record high.

Other contributing factors included rising costs of transport, restaurants and hotels, furniture and alcohol.

The monthly figures are the first to include the effects of the rise in VAT from 17.5% to 20%, which took place on 4 January.

“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,” the ONS said in a statement.

The British Chambers of Commerce believes that inflation will rise to 4.5% before it stabilises.

And it warns that although interest rates will probably have to rise later this year, the MPC should wait until the impact of the government’s cost-cutting austerity measures fully in place.

“Considering an increase in interest rates before the middle of the year would be a mistake,” said BCC chief economist David Kern.

But Alan Clarke, economist at BNP Paribas, says the base rate may now rise in the coming months.

“My own view is that it will be just after the summer, but increasingly it’s looking more likely it could happen sooner rather than later – maybe as soon as May,” he said.

The CPI rate rose 0.1% on a monthly basis between December and January – the first time since records began in 1997 that inflation has risen between those two months.

The CPI figure usually falls in January in the wake of prices being slashed in the January sales.

Bank of England governor Mervyn King will now be forced to write another letter to the government, after sending three last year, explaining what action will be taken to tackle inflation.

Until now, the Bank has been confident that the pick-up in the inflation rate would be temporary, with no need for an interest rate increase in the near term.

Last week, the Bank held interest rates at a historic low of 0.5% for the 23rd consecutive month.

The last set of UK growth figures showed that the economy contracted by 0.5% in the final quarter of 2010, and business groups have argued that a rate rise would stifle any recovery.

More economic data being released this week, including the Bank’s inflation report on Wednesday, jobs figures the same day, and retail sales figures on Friday, will be closely watched.

“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,” said Amit Kara, at UBS.

“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.”