UK inflation surges to double BoE's target

By @ibtimes on

Inflation in Britain rose to double the Bank of England's target in January, increasing pressure on the central bank to raise interest rates despite a fragile economic recovery.

Consumer price inflation surged to an annual 4.0 percent -- its highest in more than two years -- from 3.7 percent in December, official data showed on Tuesday.

On the month, consumer prices rose 0.1 percent, the first time the price level has risen between December and January on record. Prices normally fall in January due to post-Christmas discounting.

The rise was driven by higher oil prices and an increase in indirect taxation and was in line with economists' forecasts. Given the tendency of UK inflation to surprise on the upside, some in the market had positioned for an even higher reading, and the pound dipped and gilt prices turned positive after the data.

It's still high, uncomfortably high, but I think there's relief, said Ross Walker, a strategist at RBS.

However, with inflation at least a percentage point above the BoE's 2 percent target for more than a year, questions about the central bank's commitment to price stability are unlikely to go away.

BoE Governor Mervyn King will publish a letter to finance minister George Osborne at 1030 GMT explaining why inflation remains so far above target.

Previously King has blamed the overshoot on a succession of one-off factors -- such as rises in VAT, a spike in commodity prices and the depreciation of the pound. Given the length of time these supposedly temporary factors have persisted, he is coming under pressure to take a harder line.

The issue for the Monetary Policy Committee is that inflation has overshot its target for much of the last five years and many are doubting its commitment to the inflation target, said Amit Kara, UK economist at UBS.

Retail price inflation, which includes more housing costs and is the benchmark for many wage deals, surged to 5.1 percent its highest since last May

The BoE will publish a new set of growth and inflation forecasts on Wednesday that will give investors a steer on how close it is to raising interest rates.

Britain's central bank has kept rates at a record low of 0.5 percent since March 2009. Money markets show investors believe it will be compelled to raise rates by the middle of the year, most likely in May.

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