UK annual CPI inflation jumps to 3.0 pct in Dec, highest in a decade
Tuesday, January 16, 2007 4:33:33 AM
LONDON (AFX) - The Bank of England's target rate of inflation jumped to 3.0 pct in December, taking it dangerously close to 3.1 pct which would force the Governor to write a letter of explanation to the Chancellor of Exchequer, figures from the Office for National Statistics showed.
The reading is just above the 2.9 pct median forecast of analysts polled by AFX News and is the highest level since the series began in January 1997.
The jump in the CPI rate will have been a major factor in the Bank of England's surprise decision to raise interest rates to a five-and-a-half-year high of 5.25 pct last week.
The Bank of England is charged with targeting annual CPI inflation at 2.0 pct on a two-year horizon. If the rate were to deviate by more than 1 pct above or below this level, the governor Mervyn King would have to write a letter to the Chancellor of the Exchequer Gordon Brown, something that has never happened since the Bank was granted independence in 1997.
ONS officials confirmed that the BoE's Monetary Policy Committee had access to the figures during their rate-setting deliberations.
The sharp increase in inflation may well increase market expectations that the Bank of England will raise interest rates again over the coming months, possibly with a back-to-back hike next month ahead of the release of its quarterly inflation report.
The statistics office said the biggest upward effect on prices came from rises in transport costs, driven by fuel prices following the Chancellor's decision to raise fuel tax duty after the Pre-Budget Report. The average price of petrol also increased by 2.0 pence per litre between November and December, compared with a fall of 3.0 pence a year ago.
Other signficant upward effects came from furniture and household goods, with prices of furniture showing their largest month-on-month increase since the start of the official series in January 1997. Prices for recreation and culture were also up significantly, mainly due to changes in the price of computer games, non-fiction books and DVDs.
Small downward effects came from vegetable prices and from clothing and footwear, with women's outwear seeing 'widespread special offers', the ONS said.
The rise in the CPI rate is well above what the BoE forecast at its last quarterly inflation report in November, when it said it expected inflation to 'rise further above the target in the near-term, but then fall back as energy and import price inflation abate'.
On a month-on-month basis, CPI rose by 0.6 pct from November, against the previous month's 0.3 pct increase and above analysts' expectations for a rise of 0.5 pct.
Of further concern to the Bank of England's Monetary Policy Committee moreover was a sharp increase in the RPI rate, the measure which is used in pension payments and often in pay deals. The MPC has been concerned recently that rising inflation expectations would lead to higher wage deals during the key January pay round.
RPI rose by an annual rate of 4.4 pct in December, its highest level since December 1991 and following a 3.9 pct rise in November. The rate is above analysts' forecasts of 4.3 pct, with the increase due mainly to rises in mortgage interest payments -- a component excluded from the CPI rate -- following the Bank of England's quarter point rate rise in November.
On a monthly basis, RPI inflation was up 0.8 pct after a 0.3 pct rise in October, again above forecasts for a smaller gain of 0.6 pct.
Meanwhile, the RPI-X measure, which excludes mortgage payments, was up by 3.8 pct year-on-year after a 3.4 pct year-on-year rise in November. This is the highest reading since October 1992 and is above expectations for a 3.7 pct increase.
The annual RPI-X measure remains well above the 2.5 pct annual rate that the Bank of England was previously charged with targeting and is now in the territory which would have forced a letter from the governor to the Chancellor. It has been above 2.5 pct since May.
On a monthly basis, RPI-X rose by 0.6 pct, against forecasts for a 0.4 pct rise and following a 0.4 pct gain the previous month.
Elsewhere, the annual core rate of CPI inflation which excludes energy, food, alcoholic beverages and tobacco, jumped to 1.8 pct from 1.6 in November, above forecasts for a reading of 1.7 pct and the highest rate since August 2005.
On a monthly basis, core CPI rose by 0.6 pct, up from 0.2 pct in November.
