The price inflation figures published this morning make for some grim reading, if you take them at face value.
The Consumer Price Index (CPI) measure of inflation increased to 2.9%, up from 1.9% for the year to November.
The Retail Price Index (RPI) rose to 2.4%, up from 0.3% for the year in the previous month. This is the biggest monthly rise in annual inflation since 1979. RPI includes housing costs and it now at its highest level since November 2008.
This might not be Zimbabwean or Weimar Republic levels of inflation, but such a sharp rise in inflation rates in such as short space of time will put inflation back on the agenda.
So what is driving this inflation spike?
The increase in CPI was largely driven by a number of previous factors being reversed, including the VAT cut to 15% and a sharp fall in oil prices the previous December. For this reason a short-term inflation spike was to be expected.
Looking at the individual categories which contribute to the official measures of inflation, ten of the twelve examined recorded higher prices. The biggest increases came from transport, clothing and footwear.
The publication of inflation figures next month could trigger a letter from the Governor of the Bank of England to the Chancellor, explaining why they have gone over their 3% inflation target, again.
Whilst the Bank of England Monetary Policy Committee (MPC) is tasked with controlling price inflation, this sudden rise is unlikely to set alarm bells ringing at their next interest rate decision meeting.
With the UK economy still in a fragile state, and the Bank continuing with their policy of Quantitative Easing, to increase the Bank Rate now would seem unwise and counter productive. More likely is the adoption of a ‘wait and see’ approach.
