Inflation jumps again to 4.4%

22 March 2011

Consumer prices index (CPI) inflation rose to 4.4% in February, up from 4% in January - the highest level for more than two years.

The increase has been largely blamed on rising gas, clothing and footwear, and food and drink prices.

Inflation is now at its highest level since October 2008 and way above the government's 2% target.

The retail prices index (RPI), which includes mortgage interest payments, soared even higher to 5.5%, a rise from 5.1% in January. This is the highest rate for 20 years.

Average household gas bills rose by 0.4% between January and February but have fallen 2.8% from a year ago.

Following the January sales, clothing and footwear prices - particularly women's outerwear - rose 3.5%, a record increase compared to a 2% rise the previous year.

The increase in VAT in January from 17.5% to 20% is also a large factor.

Emma Wilson, director of Currency Solutions, says today's announcement shows further evidence of the 'hawkish' behaviour of the Monetary Policy Committee and increases the chance of a rate rise soon.

"There is a fine line between controlled higher inflation and high inflation controlling the economy. We are standing on that line right now" she adds.

This jump will put more pressure on the Bank of England to increase interest rates.

The Bank of England uses inflation to set interest rates. If it expects inflation to fall below 2% (the target figure) over the next year it will cut interest rates. If it expects inflation to be above the 2% target over the next year it is likely it will increase interest rates to try to subdue it.

Prolonged low base rates and high inflation are putting heightened pressure on savings. To beat inflation, basic-rate taxpayers will now need an account paying at least 5.51% to gain benefit in real terms from their savings, increasing to 7.34% for higher-rate taxpayers.

Kevin Mountford, head of banking at, says: "Given the low number of products which currently offer a return above inflation, savers really need to keep a closer eye on their interest rate and be prepared to switch to a better deal. Sitting on a low interest rate is not an option if you are concerned about inflation."

What does the rise mean for you?

Q. What is inflation?

Inflation is the rate at which the price of products and services rise. The main measures of inflation are the CPI and the RPI. They look at the price of thousands of products and services and monitor how their prices change each month. The main difference between the two is the RPI includes costs related to housing (in other words mortgage payments) while the CPI does not.

Q. Who is hardest hit by the rise?

At the moment, savers will be hit hard. With interest rates so low and inflation on the increase savings are losing their purchasing power. The products and services we buy are rising in value but the money used to buy them is not. However, anyone with a tracker or on a lender's SVR should start thinking about fixing before interest rates rise.

Q. What should you do?

Savings rates are pretty poor across the board but if you've not tried finding a new home for your savings since the credit crunch hit it's worth checking around to see what is on offer. Remember though, interest rates are likely to start rising at some point this year so locking your savings into a fixed bond now may not be the best move.

Add new comment