Tuesday, January 19, 2010
A big jump in inflation
Posted by David Smith at 10:15 AM
Category: Thoughts and responses

Inflation turned out to be worse than expected, with consumer price inflation up from 1.9% to 2.9%, a record monthly increase, RPI inflation up from 0.3% to 2.4%, its biggest monthly rise since 1979, and RPIX inflation up from 2.7% to 3.8%, a level that in the old days would have forced an open letter from the Bank Governor.

The Office for National Statistics emphasises that this inflation jump is entirely a product of what happened a year ago, when price pressures were firmly downwards. It says: "This record increase is due to a number of exceptional events that took place in December 2008: the reduction in the standard rate of Value Added Tax (VAT) to 15 per cent from 17.5 per cent; sharp falls in the price of oil; pre-Christmas sales as a result of the economic downturn.

"These exceptional events led to the CPI falling by 0.4 per cent between November and December 2008 (a record fall between these two months). The CPI increase between November and December 2009 of 0.6 per cent is far more typical (the CPI increased by 0.6 per cent between November and December in both 2006 and 2007). These exceptional events also affected the change in the RPI annual rate."

Even so, the figures show significantly higher inflation than the Bank was expecting and pose a presentational challenge. They make an open letter next month all but inevitable, are hard to square with any further quantitative easing and will ignite the debate about when the Bank will start to raise rates. I still think that's some way off but sterling has climbed again. More details here.