Pressure on BoE as UK inflation at 8-month peak
Published 19/01/2011 | 05:00
BRITISH inflation soared to an eight-month high last month as rising commodity, food and oil costs pushed up prices.
Inflation of 3.7pc piled pressure on the Bank of England to raise interest rates which would in turn push up the value of sterling against the euro. That will make it cheaper for Irish companies to export to their largest market but is likely to raise the cost of goods imported from Britain.
The biggest drivers of inflation were air transport, fuel, utility and food bills. Fuel costs rose at their fastest annual rate since July, and food prices showed their biggest annual rise since May 2009. So-called core inflation, which excludes costs of energy, alcohol, food and tobacco, rose an annual 2.9pc.
British headline inflation is now the highest of any nation in the G7 group of industrialised countries by more than a percentage point.
"This raise is becoming much more difficult for the Bank of England. Certainly there's going to be a market expectation that they move sooner rather than later," said Ross Walker at RBS Financial Markets. "So I think you'll start to see a May hike getting priced in quite soon."
Transport, including fuel, added the most to the monthly and annual price indexes in December. Transport costs jumped a record 3.6pc on the month and were up 6.5pc on the year. Food and non-alcoholic drinks rose 1.6pc on the month and 6.1pc from a year earlier. The annual gain was the biggest since May 2009. The retail price inflation gauge, which includes more housing costs and is the benchmark for many wage deals, picked up to 4.8pc from 4.7pc; the highest since July 2010.
Analysts said yesterday that UK inflation was now so high that markets were increasingly pricing in an interest rate rise by the summer to prevent a full-blown credibility crisis. Inflation is likely to climb higher still in January after an increase in value-added tax to 20pc from 17.5pc.
"The numbers are obviously a lot worse than expected. I think it does raise the risk that the Bank of England will have to move interest rates in the first half of this year," said George Buckley, economist at Deutsche Bank.
With harsh public spending cuts about to bite, the government would probably be content for interest rates to remain at rock bottom levels -- though Finance Minister George Osborne did say after the data that high inflation was a concern.