Business

UK consumer price inflation jumps to 2.9 pct

admin Contributor

LONDON (AP) — Consumer prices shot up 2.9 percent in the year to December, above the government’s target and the biggest ever month-to-month increase in the annual rate, official statisticians said Tuesday.

Analysts said higher prices could make Britain’s economic recovery more painful, but widely expected them to moderate significantly later this year.

The Office for National Statistics said December’s rate, which was higher than expected, reflected the recovery of oil prices from a year-ago slump and a sales tax cut last December.

The agency said there also appeared to be less discounting by retailers as consumer spending was strong in the run-up to Christmas.

Transport was a major contributor to the increase, with fuel and lubricant prices up 0.2 percent from November to December compared to a drop of 6.2 percent a year ago.

“The already inflationary effects of weak sterling will soon be amplified by rising commodity and energy prices triggered by growing demand in the Asian economies,” said James Hughes, economist at Black Swan Capital Wealth Managers.

“The convergence of weak sterling and rising commodity prices will be brutal for the U.K. economy in the short to medium term. But we’ll have to go through this period of high inflation in order to recover.”

Some warned that this could push the central bank to tighten monetary policy sooner than expected.

The Bank of England, which has a 2 percent inflation target, has held its key interest rate at an all-time low of 0.5 percent in an effort to spur the British economy out of a deep recession.

Jonathan Loynes, economist at Capital Economics, believes inflation might hit 3.5 percent or more in January. However, he added, “we still think that the impact of the recession and the vast amount of spare capacity created will eventually bear down strongly on underlying price pressures — the lags are often very long.”

“Consumer price inflation will be falling back from a higher level than previously seemed likely and the risk is that it will prove stickier than expected.

Vince Cable, economic spokesman for the Liberal Democrats in the House of Commons, said the December figure was probably a temporary spike.

“With inflation expected to fall quickly, it seems unlikely that the Bank of England would want to raise interest rates in the near future,” said Cable, a former oil industry economist.

“Any recovery in the economy is still very fragile, it would be all too easy to destroy it by putting the brakes on too soon,” Cable said.

Prime Minister Gordon Brown said he was not overly concerned.

“I don’t think we should read too much into one month’s figures on inflation,” Brown told reporters. “Generally Britain has had, for 12 or 13 years, a low inflation environment that has made possible low interest rates.”