UK Inflation Surges to 3.7%


UK inflation jumped in April to 3.7%, sharply higher than expected, prompting a letter of explanation from the governor of the Bank of England to the new chancellor George Osborne.

The annual inflation rate of the consumer price index was up from 3.4 per cent in March and far above the Bank’s 2 per cent target.

Higher fuel costs – as oil prices have moved higher this year but were falling a year ago in the recession – have played a big role in pushing inflation higher. Transport costs contributed 1.7 percentage points to the 3.7 per cent CPI inflation rate seen in the 12 months to April, and 2.2 percentage points to the 5.3 per cent rise in the retail price index.

The surge in inflation came amid a jump in the price of women’s clothes over the month, a pick up in food and drink prices and a rise in duties on alcohol and tobacco.

The retail price index measure of inflation jumped even higher to 5.3 per cent in April from 4.4 per cent in March, and reached its highest since 1991. The retail price index is used as a base for many public sector contracts, benefits payments and wage settlements are linked.

The further rise in inflation will prove uncomfortable for the Bank of England. Interest rates are still at 0.5 per cent and the Bank pumped £200bn in newly created cash into the economy to fight the recession.

However, the Bank has been fairly sanguine about the prospects for inflation, constantly emphasising that short-term factors such as rising oil prices and the hike in VAT this January are behind much of the recent high inflation.

In his letter to the Chancellor, Mr King said the sharp rises in oil prices over the last year, the rise in VAT and the effect of the weaker pound on import prices were behind the higher inflation. He insisted that inflation was expected to come down below target within a year.


TradingEconomics.com, FT
5/18/2010 10:17:26 AM