Inflation hits 17-month high
Economists have played down fears that interest rates will soon be on the rise after inflation shot up to 3.7% in April - its highest level since November 2008.
The larger-than-expected rise in the headline rate of inflation (consumer prices index (CPI)) was driven by big rises in the taxes levied on alcohol and tobacco as well as higher prices for women’s clothing and food prices.
Meanwhile, the retail prices index soared to 5.3% in April – its highest level since July 1991 – from 4.4% in March.
The rise in inflation means Bank of England governor Mervyn King will have to write a letter to new Chancellor George Osborne explaining the rise as it takes inflation further above the Bank’s 2% medium-term target.
However, City commentators remained largely unconcerned by today’s sharp lift to the CPI.
Howard Archer, chief UK and European economist at IHS Global Insight, says he believes today 3.7% figure will mark inflation’s peak as temporary upward pressures start to unwind.
Oil prices fell back at the first quarter of 2009 and so negative base energy effects should now be coming to an end. Meanwhile, the pound’s sharp depreciation should now have largely finished feeding through to push up prices.
Although today’s figures may lead to some heightened doubts within the Monetary Policy Committee (MPC) as to whether CPI will fall back as quickly as expected, Archer believes the central bank still looks unlikely to raise interest rates anytime soon.
However, the predicted rise in VAT to 20% to be announced in the emergency Budget could lead to a short future spike.
Jonathan Loynes, chief European economist at Capital Economics, adds the latest figures will not lead the MPC to panic.
“For now at least, the Committee remains confident – rightly in our view – that the large amount of spare capacity in the economy will eventually bear down strongly on core inflation – these things often take time.
“Admittedly, the figures won’t ease the concerns amongst one or two MPC members that inflation expectations might start to creep higher – particularly if a budget VAT rise pushes inflation itself even higher. But there is little evidence of that yet.”
With major fiscal tightening now on the cards he believes interest rates will stay where they are “for a long time”.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
Monetary Policy Committee
A committee designated by the Bank of England to regulate interest rates for the UK. The MPC attempts to keep the economy stable, and maintain the inflation target set by the government and aims to set rates with a view to keeping inflation at a certain level, and avoiding deflation. The MPC meets on the first Thursday of each month and discusses a variety of economics issues and constitutes nine members: the governor, the two deputy governors, the Bank’s chief economist, the executive director for markets and four external members appointed directly by the Chancellor.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).