British inflation rose to a six-month high in November, extending a run of upside surprises and denting lingering hopes of further monetary easing by the Bank of England.
Annual consumer price inflation rose to 3.3 per cent last month from October's 3.2 per cent, marking the 11th consecutive month it has been at least a percentage point above the BoE's 2 percent target.
The figures are likely to add to policymakers' worries that rising inflation expectations among the British public may trigger a wage-price spiral.
Inflation looks set to rise even higher at the start of next year when VAT sales tax jumps to 20 per cent from 17.5 per cent and utility providers jack up tariffs.
Sterling rose and gilts fell on the figures, which reinforced expectations the BoE's next move will be to tighten monetary policy - probably towards the end of next year.
"With GDP growth well above trend and inflation persistently above the target, there is now a negligible chance that the BoE embarks on another round of QE and, in fact, a non-negligible risk of dislodging inflation expectations," said UBS economist Amit Kara.
BoE deputy Governor Charles Bean said on Monday that policymakers were watching price pressures "like proverbial hawks" and admitted inflation had been above target for an uncomfortably long time.
However the BoE has already acknowledged that inflation will stay above 3 per cent all next year, and today's data - while disappointing - will not be a game-changer for monetary policy.
"The Monetary Policy Committee is unlikely to respond to this surprise," said Barclays Capital economist Fabio Fois. "The committee has nailed its colours to the mast: it views the current high rate of inflation as temporary."
Further signs that price pressures are growing could test the BoE's ability to keep monetary policy loose, however, especially if consumer and investor confidence that inflation will come back down begins to falter.
"The MPC is putting its credibility on the line," said Barclay's Fois. "If inflation rises further, as we expect, the situation is set to become even more uncomfortable."
So far, expectations of future inflation remain well anchored, but this may be tested over the coming months, particularly if the economy shows resilience in the face of government spending cuts.
Britain's economy enjoyed its best six-month performance in a decade between April and September, and both the BoE and the government's independent fiscal watchdog are confident growth will continue through 2011.
The biggest upward thrust to annual inflation came from food prices, which rose at their fastest pace in over a year, and clothing prices, which gained at their fastest pace on record.
Food and drink prices rose by an annual 5.5 per cent, with bread, cereals and poultry accounting for the biggest increases. Wheat prices have surged around 60 per cent since June due to poor weather in Russia, Australia and Argentina.
Higher cotton prices helpd lift clothing costs by an annual 2.1 per cent, the fastest rate since comparable records began in 1997.
Slowdowns in the pace of inflation for transport, recreation and culture, and restaurants and hotels, were not enough to stop the rise in the overall figure.
The retail price inflation gauge, which includes more housing costs and is the benchmark for many wage deals, rose at an even faster pace - to 4.7 per cent from 4.5 per cent in October.
"If inflation expectations start to respond, there is a danger that the BoE may be forced to tighten monetary policy just as the biggest fiscal squeeze for decades is hitting the economy," said Jonathan Loynes at Capital Economics.
Reuters