Money Matters, Simplified.
UK inflation rises to 3.5% in January
by Jaspreet Virk - February 16, 2010 - comments
Governor of the Bank of England Mervyn King will be writing a letter to the Chancellor, explaining the rise in inflation above the rate anticipated by the government.
The UK economy witnessed a sharp rise in consumer price inflation in January. According to the report released by the Office for National Statistics, the inflation rose to 3.5 percent last month, far above 2 percent anticipated by the government.
Inflation in December stood at 2.9 percent and the government had expected it to drop. Instead of meeting the set target, inflation not only rose by more than one percentage point but is also at the highest level since November 2008.
Governor of the Bank of England Mervyn King will be writing a letter to the Chancellor, explaining the rise in inflation, which is above the rate anticipated by the government.
The governor writes a letter every time inflation moves more than one percentage point above or below the target. It will be governor’s sixth letter since 2007. The letter will be published at 10.30 a.m. today.
Explaining the rise
The rise in inflation is largely due to increase in national sales tax.
The value added tax (VAT) has increased to 17.5 percent from the 15 percent in 2009. The government had earlier reduced VAT to tackle inflation.
The rise in inflation is also due to increase in fuel prices, which rose 25.3 percent in January compared to the same period in the previous year. The fuel price rise is also the second highest increase on record.
Further, the rise in vegetable prices, specifically cauliflower and carrots also added to inflation.
Considering the rise in fuel price and VAT, the economists had expected the consumer price index (CPI) to rise to 3.6 percent after rising 2.8 percent in December.
Inflation to rise further
Though rise in inflation has come as a surprise to the government, the Bank of England’s Monetary Policy Committee had cautioned that inflation would increase above three percent before falling again.
In fact, Howard Archer, economist at IHS Global Insight, stated, "Consumer price inflation could rise further in February as more retailers pass on January's VAT hike. However, that may well mark the peak and inflation should start to fall back in the second quarter."
If inflation remains above three percent for another three months, another letter will be written by the governor.
Despite increase in inflation, some respite is expected. The government is anticipating that the Office for National Statistics will report a drop in the level of unemployment.