INFLATION jumped at a record rate in December, official figures showed yesterday.
The consumer prices index (CPI) hit 2.9% last month – much higher than expected by the City – compared with 1.9% in November.
The surge was because VAT was unchanged last month, compared with the Government’s temporary cut to 15% to help the economy a year earlier, the Office for National Statistics (ONS) said.
It also pointed to far less discounting from retailers in the run-up to Christmas and unchanged fuel prices compared with sharp falls a year earlier.
The jump to 2.9% in December is the biggest-ever rise in the annual rate of CPI inflation in a single month.
The sharp rise took the CPI above the Bank of England’s 2% target for the first time since May. It makes an open letter from Bank of England Governor Mervyn King to the Chancellor virtually certain when inflation figures for January are released next month – which he must do when inflation misses the target by more than one percentage point.
This is because of the return of VAT to 17.5% this month, which will add to inflation when contrasted with 12 months earlier when the tax was unchanged.
The Bank has forecasted a sharp spike in CPI at the beginning of the year, but the bigger-than-expected rise may also prompt it to begin moving interest rates up from their current record low of 0.5% earlier than expected by the market.
Economist Peter Stoney, a director of the Liverpool Research Group in Macroeconomics, believes the Bank should hold its nerve, despite rising inflation. He said: “There is no need for the Monetary Policy Committee to panic and think about raising interest rates.
“The rise in the CPI and the RPI have not come as a surprise to us at the Liverpool Macro-economic Research Group, as we thought the VAT rise and the rise in oil prices would have this effect.
“What the MPC should do now is wait and see for another month.
“The VAT rise was a one-off and they should give it a bit longer to see where the oil price goes.”
The retail prices index, which includes mortgage interest payments, jumped from 0.3% to 2.4% – the biggest monthly rise in the annual rate since 1979.
