British inflation soars to 3.7 percent: data

18th January 2011, Comments 0 comments

British annual inflation hit an eight-month high at 3.7 percent in December, from 3.3 percent in November, driven by higher air fares and rising fuel and food prices, official data showed on Tuesday.

Consumer Price Index (CPI) inflation jumped by 1.0 percent in December from November, the Office for National Statistics (ONS) added.

That was the largest ever month-on-month increase since records began in 1996. Analysts had predicted a rise of 0.7 percent, according to Dow Jones Newswires.

Economists said that news of surging inflation would pile pressure on the Bank of England (BoE) to soon start raising record-low interest rates.

At 3.7 percent, the annual inflation rate stands far above the British central bank's target level of 2.0 percent.

Market expectations had been for a smaller year-on-year gain of 3.4 percent.

The ONS said the biggest upward pressures came from air transport, fuels and lubricants, domestic gas and food.

The BoE's monetary policy committee (MPC) had voted last week to hold interest rates at a record low 0.50 percent for a 22nd month in a row, despite fears over building inflationary pressures.

"Overall, this report should add to MPC members' inflation worries, making them less comfortable with the current wait-and-see stance," said ABN Amro economist Joost Beaumont.

"We think that the MPC will shift into tightening mode in the coming months."

Inflation is meanwhile expected to jump even higher in January after the British government hiked the rate of value added taxation (VAT) -- which is levied on goods and services -- at the start of the year.

December's data "pre-dates January's VAT hike which makes it all the more concerning," said Mark Bolsom, head of the UK trading desk at currency specialists Travelex.

"It will heap pressure on the Bank of England to raise interest rates.

"Unfortunately, an interest rate rise will come as a blow to consumers who have less disposable income."

The central bank's main task is to use interest rates as a tool to keep the annual inflation rate close to 2.0 percent and thereby preserve the value of money.

© 2011 AFP

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