British 12-month inflation soars to 4.0% in January

Wednesday, 16 February 2011 00:01 - - {{hitsCtrl.values.hits}}

LONDON, (AFP) - British annual inflation soared to 4.0 percent in January, the highest level for more than two years and compared with a rate of 3.7 percent in December, official data showed on Tuesday.

The January level was lower than analysts’ consensus forecast for a year-on-year rise to 4.2 percent, according to a survey by Dow Jones Newswires.

However at 4.0 percent -- the highest level since November 2008 -- it was double the Bank of England’s target rate of 2.0 percent, following a hike in the British VAT sales tax and higher oil costs.

Analysts said the data and expectations that inflation will continue to rise towards 5.0 percent would heap pressure on the BoE to soon begin lifting its key interest rate from a record low 0.50 percent.

“This will intensify pressure for an interest rate rise,” said ING Bank economist James Knightley.

The Office for National Statistics said Consumer Price Index (CPI) inflation rose by 0.1 percent in January from December on a month-on-month basis. Analysts had predicted a rise of 0.3 percent in this measure.

“Two of the main factors that had an impact on the January data are the increase in the standard rate of Value Added Tax (VAT) to 20 percent and the continued increase in the price of crude oil,” the ONS said in a statement.

The BoE, which last week voted to keep its key interest rate at 0.50 percent as it balanced the risk of rising inflation against Britain’s fragile recovery from recession, publishes its latest economic forecasts on Wednesday.

“All eyes will (now) turn to the Bank of England Inflation Report document,” said Knightley.

“The general tone of the report and the accompanying press briefing will give us a much better idea as to whether the market fully pricing in a rate hike by May is realistic.”He added: “Given the fragility of the recovery and the weight of fiscal austerity (...) we still place a high probability on there being no rate hikes in 2011.”