Inflation rises sharply

Posted on March 22nd, 2011 | Categories - News

The Office of National Statistics (ONS) has announced that inflation rose significantly last month.

The Consumer Prices Index (CPI) rose to 4.4% in February, up by 0.4% since January.

The Retail Prices Index (RPI) which includes the cost of mortgages, rose from 5.1% in January to 5.5% in February; its highest level for 20 years.

The Bank of England’s Monetary Policy Committee (MPC) has a target for CPI of 2% – this is the 15 month in a row that this target has not been met, and the current level of CPI is the highest it has been since October 2008.

Why has inflation risen so sharply?

The increases announced today were above what most experts predicted. The ONS indicated that increases in clothing and footwear prices were the most significant with prices rises for transport, heating, books and toys also playing a part. Interestingly, rises in the cost of providing financial services also played a significant part.

What now?

Today’s figures will add to the pressure on the MPC to increase interest rates sooner rather than later. Many experts believe that the only way to bring inflation back to within target is for rates to rise.

However, others feel that a rise in interest rates would risk damaging the economy, which is still recovering from a deep recession. This is a view taken by David Kern, chief economist at the British Chambers of Commerce, who said “the MPC must be careful before it takes action that may threaten the fragile recovery, particularly in the face of a tough austerity plan.

“It is likely that the MPC will look to restore its credibility and so we can expect interest rates to be raised in the next few months. However we urge the Committee to move cautiously, and avoid premature measures that may cause an economic setback” he added.

Many savers will be hoping that the MPC decide to push interest rates up in the near future. The buying power of savings is being eroded by a combination of historically low interest rates and high inflation.