UK inflation posts sharp rise

Prices post a shock rise in January

UK inflation has soared unexpectedly, making an increase in interest rates in March more likely.

The annual rate of inflation excluding mortgage repayments jumped to 2.6% in January, up sharply from 1.9% in December, the Office for National Statistics said.

The acceleration in (inflation) is surprisingly sharp

Bank of America economist Jeremy Hawkins

The latest figure means that UK inflation has edged into the upper end of the government's annual target rate of 1.5-3.5% for only the second time since April 1999.

Most analysts had predicted a January inflation rate of just 2.2%.

January inflation including mortgage repayments rose to 1.3% from 0.7% in December.

Interest rate outlook

In the City, investors bet that the Bank of England would raise interest rates in the coming months, pushing the pound slightly higher against the dollar.

The Bank of England's monetary policy committee (MPC) has cut interest rates by two percentage points to a 37-year low of 4% since February last year in an effort to stimulate the flagging economy.

UK inflation

Sep 2001 2.3%

Oct 2001 2.3%

Nov 1.8%

Dec 2001 1.9%

Jan 2001 2.6%

But most economists believe that the bank is now poised to raise the cost of borrowing in order to choke off a sharp rise in consumer spending, fuelled by an increase in personal debt.

The latest inflation figures reinforce that view.

Some analysts said last month's sharp increase is likely to be a one-off jump due to seasonal factors, predicting that inflation growth will moderate later on.

"The acceleration in (inflation) is surprisingly sharp...Even so, base effects should see inflation fall back again in February, and in general I would expect prospective moves to be supportive of stable rates over the foreseeable future," said Jeremy Hawkins, economist at the Bank of America in London.

Food and fuel prices on the rise

The ONS blamed the jump in inflation on higher petrol prices and a seasonal increase in the price of food.

The effect on the annual inflation figure of the higher petrol prices, linked to a jump in world crude oil prices last month, was magnified by a steep drop in fuel costs in January 2001.

An increase in the price of TV licences and more moderate discounts on clothes and footwear during the January sales also contributed to last month's higher inflation rate.

The latest ONS data once again highlighted the imbalance between the UK's service and manufacturing economies, with service sector inflation running at 4.6% in January compared to just 0.5% in the manufacturing sector.

Manufacturing woe

Manufacturing groups on Tuesday played down the overall increase in inflation, urging the MPC to hold off putting up interest rates when it next meets on 6 and 7 March.

"The lid remains firmly on inflation, and we would not expect a short-term jump in seasonal food prices and motoring costs to carry much weight with the Bank's longer term outlook," said Dougie Peedle, depute chief economist at the Engineering Employers' Federation.

The Bank of England will on Wednesday publish its three-monthly inflation report, which is expected to predict that price growth will remain below the government's symmetrical 2.5% target rate for the rest of the year.

The BoE is tasked with keeping inflation within a single percentage point either way of the 2.5% target by raising or lowering the cost of borrowing.