The latest price inflation figures for the year to November 2010 show the Consumer Prices Index (CPI) increasing to 3.3%, from 3.2% the previous month.
The Retail Prices Index (RPI) measure of price inflation, which includes mortgage and housing costs, also increased. For the year to November 2010, RPI was 4.7%, up from 4.5% last month.
Both inflation figures were pushed higher by record food, clothing and furniture price rises.
Perhaps unsurprisingly, some are already calling for interest rates to rise to bring this price inflation under control.
Bank of England Monetary Policy Committee (MPC) member Andrew Sentance has favoured an interest rate rise for some time. Until the publication of the next MPC minutes, we will not know if he has any support on the committee.
But is price inflation really a problem that needs to be controlled in the early part of 2011 with an interest rate hike?
Trevor Greetham, the Asset Allocation Director at Fidelity Investments, believes that rather than having an inflation problem in the UK, we have a tax problem.
In his analysis of the latest inflation figures, Greetham points to the contribution of VAT to these inflation figures. Whilst CPI inflation is at 3.3% when VAT is included, it falls to 1.5% net of VAT.
Therefore, he argues that CPI above the government target of 2% is simply a consequence of VAT going up from 15% to 17.5% in January 2010. This will be repeated again in January 2011, when VAT goes up to 20%.
Assuming VAT is the reason for CPI above the government target for price inflation, the Bank of England is unlikely to be too concerned about the current level of price inflation.
Another important consideration is falling house prices.
Consumer spending and confidence levels are closely correlated in the UK to the movement of house prices. The combination of a property market starting to fall and a VAT rise in January is likely to put people off spending money on the High Street in the early part of next year.
Taking into account this analysis of the VAT contribution to price inflation, and recent figures showing another month of house price falls, we feel it is unlikely the Bank of England will move too quickly to increase interest rates.
Photo credit: Flickr/Marco Bellucci
