Inflation at highest level for 17 months

Published on Tuesday 18 May 2010 21:01

INFLATION has risen to its highest level in 17 months, putting increasing pressure on families' budgets.

The cost of living has been driven up by rising food costs – with the weakness of the pound making imports more expensive – and duty hikes revealed in March's Budget.

The Consumer Price Index, the government's preferred measure of inflation, reached 3.7 per cent in April – its highest level since November 2008 – while the alternative Retail Price Index also jumped to 5.3 per cent.

The Bank of England's target level for CPI is 2 per cent, and the current rate prompted governor Mervyn King to write an open letter to the new Chancellor, George Osborne, in which he said he expects CPI to drop back to his preferred level "within a year". Economists do not expect him to try to force it down by raising interest rates from their current level of 0.5 per cent.

A rise in VAT from 17.5 per cent to 20 per cent in next month's emergency Budget – a move tipped by 24 out of 29 economists who had carried out work for the Treasury – would push inflation up further.

David Cameron has said the government "does not have plans to raise VAT", but has not ruled it out either. Despite this, economists do not believe that inflation will continue to rise.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "I don't think there is a reason to be concerned at this stage, as it is being pushed up by temporary factors, notably January's VAT hike, higher energy prices and sterling's past weakness, and these should feed through.

"Nevertheless, it is obviously eating into many people's purchasing power – especially as earnings growth is muted. I do expect inflation to fall back appreciably over the coming months, although there is the very real likelihood that VAT will rise from 17.5 per cent to 20 per cent which will lead to another move up."

Iain McMillan, director of the CBI in Scotland, said: "The trick, going forward, for the Monetary Policy Committee is dealing with inflation in such a way that does not compromise the slow recovery of the economy."

Annual food inflation reached 2.6 per cent last month, the highest since last July. Alcohol and cigarette duty hikes in March's Budget pushed it up even further, while clothing and footwear prices have also risen in the last 12 months.

Average petrol prices hit 120.2p a litre last month – the highest since records began in 1996 – but the impact on inflation was limited as there were similar rises a year earlier. Mortgage interest payments rose by just 0.6 per cent.

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