Inflation up to 3.5% in January, but 'no nasty upward surprises'

Tuesday 16th February 2010

Inflation in the UK rose to 3.5 per cent in January, up from 2.9 per cent in the previous month and its highest level since November 2008.

Official figures from the Office for National Statistics (ONS) showed "record consumer price inflation (CPI) monthly movement for a December to January period"; due predominantly by the VAT increase, but also in part to less discounting in shops.

The ONS said that although the all-time CPI index fell by 0.2 per cent between December and January, this is the strongest ever CPI growth between these two months, when prices traditionally fall fast. As well as the VAT rise from 15 to 17.5 per cent, the ONS said the figure was partly due to an increase in oil prices.

Howard Archer, chief UK and European economist at IHS Global Insight commented following the ONS inflation report: "Inflation spiked up to a 14-month high of 3.5 per cent in January but at least this was in line with expectations and there was not one of the recent nasty upward surprises.

"Inflation was always going to spike in January due to the VAT hike and unfavourable base effects resulting from sharply falling oil and food prices a year ago. In addition, it appears that retailers engaged in significantly less discounting in the post-Christmas clearance sales this January compared to January 2009 when they had higher stock levels and were especially worried about the prospects for consumer spending."

The ONS said by far the largest upward contribution to the change in CPI annual inflation between December and January came from transport.

Last week the Bank of England had announced it expected inflation to peak higher than three per cent in the coming months. Mervyn King, the bank's governor, said prices would rise following the VAT increase, but after peaking at around 3.5 per cent, inflation would fall again, as the economy 'bounced along the bottom'.

In its quarterly inflation report, the Bank said: "The strength of the recovery is highly uncertain. It is difficult to assess with precision the impact of the unprecedented loosening in monetary policy when other significant and unusual forces are affecting the economy."

While the Bank's report found: "The extent to which CPI inflation will deviate from the two per cent target in the medium term is highly uncertain."

Mr Archer added: "Given the extent of the spike up since last September, there is obviously the risk that inflation could be stickier than expected and not fall back as much or as quickly as hoped. Nevertheless, we believe consumer price inflation could well be back under 2.0 per cent by the end of the year and then largely stay there during 2011 (unless VAT is raised to 20 per cent as part of fiscal tightening measures)."

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