U.K. Inflation Rate Accelerates

U.K. inflation accelerated in January to the fastest pace in 14 months as an increase in sales tax pushed the rate high enough to prompt a public letter of explanation from Bank of England Governor Mervyn King.
TradingEconomics.com, Bloomberg 2/16/2010 9:31:58 AM

Consumer prices rose 3.5 percent from a year earlier, the most since November 2008, the Office for National Statistics said. A reading deviating more than a percentage point from the bank’s 2 percent target requires King to write to Chancellor of the Exchequer Alistair Darling setting out his plans to return to the goal.

King predicted last week that this bout of inflation will ebb as slack caused by the recession curbs consumer-price pressures. The Bank of England, which paused its 200 billion- pound ($314 billion) emergency bond-purchase plan this month, is bracing for volatile data in the aftermath of the slump at a time when the looming election clouds the economic outlook.

Inflation accelerated as prices of alcohol, tobacco, recreation, and bills at restaurants and hotels were pushed higher by Darling’s reversal of a 2.5 percentage-point cut in value-added tax last month. Transport costs also increased, climbing 11 percent on the year, the most on record.

Retail discounts made in the depths of the recession a year earlier weren’t repeated last month while the pound’s decline of about a quarter on a trade-weighted basis in the past three years has pushed up the price of imports.

On the month, prices fell 0.2 percent, the smallest drop for January since records began in 1997.

Core inflation, which excludes costs of energy, food, alcohol and tobacco, accelerated to 3.1 percent in January, the fastest pace on record, the statistics office said. Economists had forecast 3.2 percent, according to the median of 11 predictions in a Bloomberg News survey.

King said last week that the central bank can’t control short-term price moves as the pound’s weakness, higher commodity costs and the expiry of the sales-tax cut stoke consumer prices. Inflation will slow as low as 0.9 percent later this year and stay below the target as slack in the economy suppresses price pressures, the Bank of England said on Feb. 10.

The retail price index, a cost of living measure used in wage negotiations, showed a 3.7 percent annual increase, compared with 2.4 percent the previous month. Excluding mortgage interest payments, prices rose 4.6 percent, the most since October 2008, the statistics office said.

U.K. Inflation Rate Accelerates