The Consumer Price Index (CPI) rose to 3.7 percent in December compared to 3.4 percent recorded in November on an annualized basis, according to latest data released.
Retail Price Index (RPI) – another barometer of inflation which includes mortgage interest as a component was up as well to 4.8 percent from 4.7 percent.
The latest figure will surely cause inconvenience to the Bank of England and put pressure on it to hike interest rates to curb spiraling inflation.
The hike in VAT to 20 percent from 17 percent and higher fuel costs may exacerbate the situation further in January. Inflation has been higher by at least one percentage point than the targeted 2 percent for the last 13 straight months, forcing BoE Governor Mervyn King to write four letters to Chancellor in 2010.
However, Bank of England still hopes that inflation will come down in the longer term as the new government announced unprecedented spending cuts since World War II, which it feels will slow down demand in the next two years. As the economy slowly gathers steam, an interest rate hike may discourage industries from fresh borrowings – the central bank fears.