Inflation soars in Europe, China

15th February 2011, Comments 0 comments

Britain's annual inflation rate hit a two-year high in January, official data showed Tuesday, as China and Spain also announced soaring consumer prices as a result of surging food and oil costs.

Analysts said higher prices would put pressure on central banks to raise interest rates although they will be cautious not to overdo it given the need to preserve and bolster economic recovery.

British consumer price index (CPI) inflation jumped to 4.0 percent, the highest level since November 2008. That followed 3.7 percent in December but undershot market expectations of 4.2 percent.

The Office for National Statistics blamed the combined impact of soaring oil prices, which blasted their way past $100 a barrel at the end of January, and a recent hike in the level of Britain's VAT sales tax.

Inflation is now double the Bank of England's target rate of 2.0 percent, stoking expectations that it could hike British interest rates from the current record-low 0.5 percent -- where they have stood since March 2009.

"This will intensify pressure for an interest rate rise," said ING Bank economist James Knightley.

In Asia, China said Tuesday that its inflation rate hit 4.9 percent last month, running close to a two-year high and sparking renewed speculation of more monetary tightening from Beijing.

Rocketing Chinese inflation comes despite three interest rate hikes in four months and several increases in the amount of money banks must keep in reserve to cut lending.

In Europe, Spain said its annual inflation rate hit a two-year high of 3.0 percent in January, propelled also by energy and food prices. Bulgaria and Hungary also announced that inflation held above 4.0 percent last month.

"There are increasing signs that economies across the globe are re-flating," said Kathleen Brooks, research director at trading site

"China and the UK both recorded elevated levels of inflation in January," she added.

However, she argued that policymakers were keen not to derail the global economy with sharp rate hikes for the time being.

"So far, central bankers have not shown themselves to be too keen to raise rates at all (the UK's case), or not at a fast enough clip to halt inflationary pressure (China's).

"This should help the outlook for the global economy -- at least central bankers don't look like they will tighten too much to choke off growth -- well, not yet anyway."

VTB Capital economist Neil MacKinnon described the threat of soaring inflation as a major "challenge" for nations that are still struggling to cope with the fallout from the global financial crisis.

"Rising inflation, in many cases from a low base and from a backdrop of deflationary worries arising from the financial crisis, is certainly a key challenge for global policy makers -- especially for inflation-targeting central banks," MacKinnon said.

"In emerging market economies, strong economic growth and little spare capacity, policymakers are already raising interest rates and/or increasing reserve requirements to tighten liquidity.

"However, the most immediate inflationary effect is from rising food and energy prices."

Aside from high commodity prices, British inflation was propelled higher last month after the government ramped up taxation on goods and services, as part of its deficit-slashing austerity measures.

Prime Minister David Cameron's Conservative-Liberal Democrat government hiked the rate of value-added taxation, or VAT, to 20 percent at the start of the year from 17.5 percent.

The BoE, which held rates again last week as it balanced the risk of rising inflation against Britain's fragile recovery from recession, publishes its latest economic forecasts on Wednesday.

British gross domestic product (GDP) surprisingly shrank 0.5 percent in the three months to December, the first drop in economic output since the third quarter of 2009, stoking fears of a so-called "double dip" recession.


© 2011 AFP

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