UK consumer price inflation hits 4%
February 15, 2011 -- Updated 1254 GMT (2054 HKT)
A shopper searches for clothing bargains at Bolton Market in the UK as figures show another rise in inflation.
STORY HIGHLIGHTS
- UK consumer price index rises to 4% in January, in line with forecasts
- Reading puts pressure on Bank of England to raise interest rates
- Biggest monthly rise came from the alcohol and tobacco sector
- Some economists expect inflation to rise further in the next few months
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(FT) -- UK price inflation hit 4% in January, in line with economists' expectations but double the Bank of England's target of 2%.
The latest reading triggered yet another round of letters between Mervyn King, the Bank's governor and George Osborne, the chancellor, with Mr King forced to explain why prices are rising so quickly and what the Bank intends to do about it.
The rise in consumer price inflation was in line with the average forecast of economists polled by Thomson Reuters, but there was a much wider range of projections. The key uncertainty had been the extent to which retailers would rush to pass on to consumers January's rise in value added tax to 20%.
"With fuel and food prices continuing to head higher we still suspect headline CPI will push above 4.5% in the next few months," said James Knightley, economist at ING Bank. "This will intensify pressure for an interest rate rise so all eyes will turn to the Bank of England inflation report document, to be published tomorrow."
Month on month, the index rose 0.1 percentage points, with the biggest rise coming from the alcohol and tobacco segment, which registered a record month-on-month price increase of 4.6%, largely reflecting higher VAT. The transport (1.0%), communication (1.3%) and restaurants and hotels (1.3%) segments also recorded significant month-on-month rises.
The Office for National Statistics said that the VAT rise had weighed heavily on the restaurants and hotels sector.
Within transport costs, the largest upward effect came from fuels and lubricants, for which a combination of the VAT rise, a rise in fuel duty and higher prices for crude oil all pushed costs upwards.
However, the rises were somewhat offset by a 5.9% month-on-month fall in clothing and footwear prices as retailers cut prices in the post-Christmas January sales.
Chris Williamson, economist at Markit, noted that the annual CPI rate is now the highest since late-2008. Much of the rise, he noted is the result of factors outside of the control of monetary authorities, notably rising import prices caused by a weak pound and higher oil and commodities prices.
"However, the data do nothing to change the dilemma facing the Bank, whereby short-term price pressures are encouraging some members of the monetary policy committee to hike interest rates, but others fear a rate rise will threaten the fragile recovery," Mr Williamson said.
Year-on-year, the retail price index rose by 5.1%, but month-on-month it rose by 0.3 per cent.
In explaining the disparate performance between the two indices, the ONS noted that furniture and furnishings, petrol and oil, and car insurance -- which has risen sharply -- all have higher weightings in RPI than in CPI.
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