UK 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.
Consumer prices rose 3.5 per cent from a year earlier, the most since November 2008, the Office for National Statistics said in London today. A reading deviating more than a percentage point from the bank's 2 per cent 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 ($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 also clouds the economic outlook.
"It's a big overshoot, but the issue is less where about where it peaks, but how quickly it comes back," Ross Walker, an economist at Royal Bank of Scotland Group Plc in London, said in a telephone interview before the announcement. "Inflation is going to fall back, I just don't think it's going to fall back anything like as quickly as the Bank of England projects."
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 sales tax last month. Transport costs also increased, climbing 11 per cent on the year, the most on record.
Inflation has also accelerated as retail discounts in the depths of the recession a year earlier weren't repeated and because of the pound's decline of about a quarter on a trade- weighted basis in the past three years.
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 per cent later this year and stay below the target as slack in the economy suppresses price pressures, the Bank of England said on Feb 10.
Today's letter from King is the sixth since the bank was granted independence in setting interest rates in 1997. The governor said last week that it's "far too soon" to say policy makers have finished buying bonds to aid the economy.
"If inflation doesn't start to fall back as rapidly as they project -- and by the middle of this year we will have an early sense of that -- that could be the point where their credibility starts to get tested a bit more," RBS's Walker said.
The retail price index, a cost of living measure used in wage negotiations, showed a 3.7 per cent annual increased, compared with 2.4 per cent the previous month. Excluding mortgage interest payments, it rose 4.6 per cent, the most since October 2008, the statistics office said.
Bloomberg