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Inflation jumped at a record rate in December, official figures showed today.
The Consumer Prices Index (CPI) hit 2.9% last month - much higher than expected by the City - compared with just 1.9% in November.
The surge was because VAT was unchanged last month compared with the Government's temporary cut to 15% to help the economy a year earlier, the Office for National Statistics (ONS) said.
Far less discounting from retailers in the run-up to Christmas last month and unchanged fuel prices compared with sharp falls a year earlier added to the inflationary pressure, the ONS said.
The jump to 2.9% in December is the biggest ever rise in the annual rate of CPI inflation in a single month, the ONS said.
The extraordinary factors take the CPI above the Bank of England's 2% target for the first time since last May and make an open letter from Bank of England Governor Mervyn King to the Chancellor virtually certain when inflation figures for January are released next month.
This is because of the return of VAT to 17.5% this month, which will add to inflation when contrasted with 12 months earlier when the tax was unchanged.
The Bank has forecasted a sharp spike in CPI at the beginning of the year, but the bigger-than-expected rise today may also prompt it to begin moving interest rates up from their current record low of 0.5% earlier than expected by the market.
The ONS figures showed average petrol prices edging 0.2p higher last December compared with a 6p fall a year earlier, which was the second biggest monthly fall on record.
Clothing and footwear prices fell by far less than a year ago, when the temporary VAT cut came into price and many retailers were forced into early sales to tempt shoppers through the door during the worst point of the recession.
The Retail Prices Index, which includes mortgage interest payments, also jumped from 0.3% to 2.4% on the month. This is the biggest monthly rise in the annual rate since 1979.
Jonathan Loynes, Chief European economist at Capital Economics, said the higher-than-expected figures should not throw Bank of England rate-setters into "a blind panic" - although he added that "nerves will be sorely tested over the next few months".
"We still think that the impact of the recession and the vast amount of spare capacity created will eventually bear down strongly on underlying price pressures," he said.
Reader views (15)
Low interest Rates are only plausible in a growing economy, not in a ‘Deep Recession’, which this Government can’t handle.
Also ‘Excessive Taxes’ in the UK are killing off businesses due to this government’s proven total lack of ability to handle the money it gets.
Perhaps the only things Labour are any good at is encouraging the ‘Teenage Baby Farms’ to grow, plus falsified unemployment figures.
Whilst High Street Shops are closing down every week, Darling says we’re coming out of recession.
Government seriously needs to reduce the vast army of ‘Civil Servants’ that are draining the countries economy. The country is living on ‘Taxpayers Credit’ the repayments may soon escalate to a very serious degree indeed.
Signed Carl Barron Chairman of agpcuk
- Carl Barron, Christchurch, Dorset, 19/01/2010 21:22
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Keith Price Luton - Over to you for the comedy.
- Abominable Snow Man, London, 19/01/2010 15:37
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Brown would play it down (i.e. lie) wouldn't he? Thanks to his mismanagement of the economy we will have rampant inflation in 12 months time unless we get rid of him before then.
- Roger, winchester, england, 19/01/2010 14:07
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We are all ok then so says Boom and Bust,must be true then!
- Tojo, Hythe, 19/01/2010 12:41
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Surely it is due to the Government running out of ways to fiddle the shopping basket, which it has been doing for years. Fuel prices alone drive up the price of goods that depend on energy - like practically everything important.
- Bj, East London, 19/01/2010 12:26
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it is only a matter of time until rates are increased. The Bank of England should be taking action now but of course a decision will be delayed until after the election for political reasons - so much for an independent central bank!
- Mark Simmonds, London, 19/01/2010 12:03
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Never mind just think of Tory Inflation rates of 15% that should put this into context!!
What would'nt most earlier chancellors have given for the low rate of inflation GB has maintained for many years now.
Anyway we were told that deflation (ie prices falling) was bad for the economy so a bit of inflation will do us some good?
- Melvyn Windebank, Canvey Island, Essex, 19/01/2010 11:48
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I heard a commentator on the BBC this morning stating that this was an unusual blip due to the decrease in the pound and increase in oil prices.
However the essence of the article was that it was to be expected and would not change the course of recovery.
In view of the above I am suprised to read so many unbalanced comments.
- Richard, London, 19/01/2010 11:42
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The value of the pound is falling under Gordon's reign and has less purchasing power in international markets. More of these devalued pounds are needed to buy stuff so prices, in sterling, rise. So price inflation is the flip-side of the devaluation coin. Gordon devalues and corrupts everything around,
- Michael, Worcester, 19/01/2010 11:26
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So he can add stagflation to his CV...impressive work, Gordy, not many people could have achieved what you did during your time in power...
- St, London, 19/01/2010 11:23
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Words fail me at Gordon Brown's attitude and mentality.
- Tyler Durden, Milan, 19/01/2010 11:10
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Have you noticed how Broon's comments all come from the same Rollodex of excuses.If you replace the xs with words they cover a multitude of eventualities.Well done the wordmunchers at No.10.
"I don't think we should read too much into xxxx
"Generally Britain has had for 12 or 13 years xxx that has made possible xxx."
- Amoreno, Luxembourg, 19/01/2010 11:08
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So now we have both rapidly increasing inflation, rising unemployment, soaring public debt and declining national output. Quite an achievement even for this incompetent government. It is hardly surprising that the value of sterling has fallen by 25% in the last year.
- Simon Ellis, London, 19/01/2010 11:03
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Gordon welcomes inflation as it inflates away the public and private debt he and his citizens have amassed.
- Alex, Fulham, 19/01/2010 10:43
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Doesn't Gordon desperately want us to spend more to fill the Treasury coffer to balance the books? Doesn't spending more result in rising prices and imports? Do not rising prices result in inflation? Have I got it all wrong or is Gordon triangulating? Please help!
- Albert Hall, hove england, 19/01/2010 10:24
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