Inflation in Britain has jumped by the biggest margin on record between November and December..
The Consumer Prices Index (CPI) measure of inflation, the Bank of England’s preferred measure, soared to 2.9 per cent, up from 1.9 per cent in November - far higher than the expected increase to 2.6 per cent and well above the Bank of England’s target of 2 per cent.
It is now widely expected that inflation will rise above 3 per cent in January, forcing Mervyn King, the Governor of the Bank of England, to write a letter to the Chancellor to explain why inflation has risen by 1 per cent above the target. This would be the sixth such letter since 2007.
Analysts attribute much of the rise in inflation to base factors filtering through from December 2008 when the VAT rate was cut to 15 per cent as well as sharp falls in the price of oil. VAT has since returned to 17.5 per cent.
However, many expect that inflation will start to fall again after peaking this month, as does the Bank of England.
Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club told the Times of London yesterday: “Strong base effects are continuing to exert upward pressure on inflation.
“The increase partly mirrors the sharp falls seen at the end of 2008 following the oil price spike and the impact of reduced VAT in December 2008. We do not anticipate any tightening of monetary policy to dampen this short-term phenomenon as beyond January, inflation should continue on a downward path well into 2010.”
The main upward pressure on inflation came from the cost of fuel, which rose by 0.2 per cent between November and December, compared to a 6.2 per cent drop 12 months earlier.
The Retail Price Index (RPI) measure of inflation, which includes housing costs such as mortgage payments, also soared, climbing to 2.4 per cent in December from 0.3 per cent in November, figures from the Office for National Statistics (ONS) showed.
Core CPI, which excludes food, energy, tobacco and alcohol, rose by 2.8 per cent on the year - its fastest pace of growth since records began in January 1997.
