Inflation reaches two-year high of 4 per cent

Published on Tuesday 15 February 2011 11:50

THERE was renewed pressure on the Bank of England to raise interest rates today as inflation increased to its highest level in more than two years in January.

The Consumer Prices Index (CPI) rose to 4 per cent last month, from 3.7 per cent in December, the Office for National Statistics (ONS) said, as the increase in VAT from 17.5% to 20% and the soaring cost of crude oil pushed up the cost of living.

Today's CPI figure, the highest since November 2008, is double the Government's 2 per cent target and is likely to throw weight behind the argument for hiking interest rates from a historic low of 0.5 per cent.

As inflation has been more than 1 per cent above target for three months, it will trigger a letter of explanation from Bank of England Governor Mervyn King to Chancellor George Osborne.

The CPI rate unexpectedly surged from 3.3 per cent to 3.7 per cent in December, prompting calls for an interest rate hike. But weaker-than-expected economic growth figures, revealing a 0.5% decline in gross domestic product in the final quarter of 2010, dampened this prospect.

The economy is in a fragile position - teetering close to a period of so-called stagflation, when sluggish growth and high unemployment combine with soaring prices. Last week, the Bank held interest rates for the 23rd consecutive month.

Economists had expected inflation to hit 4.1 per cent in January, so it has come in slightly below expectations.

But the CPI rate of inflation rose by 0.1 per cent on a monthly basis between December and January - the first time since records began in 1997 that inflation has risen between those two months.

The price of petrol as recorded by the CPI stood at 1.27 a litre in January 2011, a record high, the ONS said.

Other contributing sectors included transport, restaurants and hotels, furniture and alcohol.