Inflation rises sharply

20 April 2010

The inflation rate rose sharply in March on the back of higher fuel costs and the effect of flat gas bills compared to this time last year, when they had a major drop.

The consumer prices index (CPI) climbed to 3.4% from 3% the previous month, much higher than the anticipated 3.1% increase.

Meanwhile, the retail prices index soared to 4.4% in March from 3.7%.

Experts say the latest data could provoke a few jitters although it is unlikely to cause the Monetary Policy Committee (MPC) to tighten its policy.

Jonathan Loynes, chief European economist at Capital Economics, says: “UK inflation remains well above its target. But with the vast amount of spare capacity in the economy set to bear down on price pressures over the coming year, the MPC should be happy to look through the rise and leave its extremely loose policy stance in place.”

Mark Bolsom, head of the UK trading desk at Travelex, says the weak pound is also pushing up inflation.

“A weak pound and high energy prices are driving up the cost of imported goods. This data adds to the confusing economic outlook - on the one hand, we need a weaker pound to boost our export-led growth, but on the other hand, the UK is an import based economy. There is a significant downside to a weaker pound, as illustrated by this data,” he says.

However, others point out that the first quarter average of 3.3% is exactly in line with the projection made by the Bank of England in its February Quarterly Inflation Report.

Economists expect the blip to be temporary with inflation falling back in the second half of the year.

Howard Archer, chief UK and European economist at IHS Global Insight, says: “The CPI is likely to hover around 3-3.5% in the near term, due to unfavourable base effects resulting from the marked retreat in inflation a year ago when the recession was at its deepest.

“However, the CPI will hopefully be firmly on a downward path by the end of the second quarter. Indeed, we believe consumer price inflation could very well be back under the Bank of England's target level of 2% by the end of the year.”  

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