Consumer price inflation touches 4% in January

High Inflation will Worry Bank of England

High Inflation will Worry Bank of England

The consumer price inflation touched the 4% mark in January, twice the target set by Bank of England and in line with economists’ expectations.

The latest data is sure to increase the discomfort of the governor of the central bank Mr. Mervin King and may force him to explain about the possible measures he intends to take to moderate the inflation rate.

Thompson Reuters economists had projected similar rise in inflation although the range varied widely. Also there has been difference of opinion about how the retailers will pass on the increased VAT to consumers.

James Knightley, an economist with ING Bank said: “With fuel and food prices continuing to head higher we still suspect headline CPI will push above 4.5 per cent in the next few months. This will intensify pressure for an interest rate rise so all eyes will turn to the Bank of England inflation report document, to be published tomorrow”.

Alcohol and tobacco was the biggest driver of the latest rise registering a monthly growth rate of 4.6% while the Consumer Price Index (CPI) rose by 0.1% month-on-month. Other segments which saw significant rise were restaurant and hotels, communication transport.

The Office for National Statistics (ONS) said VAT impacted the hotel and restaurant sector heavily.

The jump was compensated for by the price fall of footwear and clothing, which dipped by 5.9% month-on-month as retailers offered heavy discounts before the VAT hike came into effect.

Chris Williamson of Markit said that the current inflation is beyond the control of monetary policymakers as a weak domestic currency and world wide high prices of oil and commodities have aggravated the situation. CPI now stands highest since late 2008.

Explaining the dilemma of the central bank, Mr. Williamson said: “However, 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”.

The Retail Price Index (RPI) has risen by 5.3% over the same period last year while it rose 0.3% on month-on-month basis. The prices of oil and petrol, furniture and furnishings and car insurance – have higher weightings in the RPI than CPI and have gone up sharply said ONS, explaining the reading difference in the RPI and CPI.

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