Jump in inflation puts pressure on BoE to raise rates
By Fiona Shaikh and David Milliken |
January 19, 2011, Wednesday
|
Print Edition
Print Edition
A RECORD monthly jump in prices drove British inflation to an eight-month high in December, piling pressure on the Bank of England to raise interest rates and show it is not letting inflation get out of control.
The Office for National Statistics said the annual rate of consumer price inflation rose to 3.7 percent last month from 3.3 in November - much higher than analysts' forecasts for a steady reading, after prices rose a record 1 percent between November and December.
The pound shot up more than half a US cent against the US dollar to an eight-week high, gilt futures dropped to a contract low and interest rate futures fell sharply as investors ramped up bets on when the BoE will start tightening policy.
Inflation has been at least a percentage point above the BoE's 2 percent target throughout 2010, and rising inflation expectations among the general public and bond investors have caused markets to price in a first rate hike by mid-year.
Inflation is likely to climb yet higher in January, as an increase in value-added tax to 20 percent from 17.5 takes effect.
"The numbers are obviously a lot worse than expected. I think it does raise the risk that the Bank of England will have to move interest rates in the first half of this year," said George Buckley, economist at Deutsche Bank.
The BoE forecast in November that inflation would average around 3.2 percent in the fourth quarter of 2010. More recently policymakers have said it could hit 4 percent early in 2011, due to January's VAT rise.
The ONS said the biggest drivers of inflation last month were air transport, fuel, utility and food bills. Fuel costs rose at their fastest annual rate since July, and food prices showed their biggest annual rise since May 2009.
Oil prices are fast approaching US$100 a barrel, far higher than the BoE assumed in its November Inflation Report.
But policymakers argue that the factors driving prices at the moment are temporary, and that raising interest rates in response risks derailing a fragile economic recovery.
The Bank of England had an estimate of yesterday's inflation data when it made its decision last week to leave interest rates at a record low of 0.5 percent.
The Office for National Statistics said the annual rate of consumer price inflation rose to 3.7 percent last month from 3.3 in November - much higher than analysts' forecasts for a steady reading, after prices rose a record 1 percent between November and December.
The pound shot up more than half a US cent against the US dollar to an eight-week high, gilt futures dropped to a contract low and interest rate futures fell sharply as investors ramped up bets on when the BoE will start tightening policy.
Inflation has been at least a percentage point above the BoE's 2 percent target throughout 2010, and rising inflation expectations among the general public and bond investors have caused markets to price in a first rate hike by mid-year.
Inflation is likely to climb yet higher in January, as an increase in value-added tax to 20 percent from 17.5 takes effect.
"The numbers are obviously a lot worse than expected. I think it does raise the risk that the Bank of England will have to move interest rates in the first half of this year," said George Buckley, economist at Deutsche Bank.
The BoE forecast in November that inflation would average around 3.2 percent in the fourth quarter of 2010. More recently policymakers have said it could hit 4 percent early in 2011, due to January's VAT rise.
The ONS said the biggest drivers of inflation last month were air transport, fuel, utility and food bills. Fuel costs rose at their fastest annual rate since July, and food prices showed their biggest annual rise since May 2009.
Oil prices are fast approaching US$100 a barrel, far higher than the BoE assumed in its November Inflation Report.
But policymakers argue that the factors driving prices at the moment are temporary, and that raising interest rates in response risks derailing a fragile economic recovery.
The Bank of England had an estimate of yesterday's inflation data when it made its decision last week to leave interest rates at a record low of 0.5 percent.
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