Bank pressured by inflation rise
A bigger-than-expected rise in the cost of living in December has piled pressure on the Bank of England to raise interest rates in an effort to curb spiralling inflation.
The Consumer Prices Index (CPI) rate of inflation surged to 3.7% last month, its highest level since April and up from 3.3% in November, the Office for National Statistics (ONS) said. Economists were expecting the rate to rise to 3.4%.
Surging food costs, nudged up by the weather disruption, energy bills and petrol prices led to a month-on-month prices increase of 1% between November and December, the biggest monthly rise since records began in 1996, the ONS added.
The Bank, which is tasked with bringing inflation down to its 2% target, has resisted lifting interest rates from historic lows of 0.5% as the wider economy battles with slovenly growth. The rate of CPI has been above its 2% target every month since November 2009.
Policymakers at the Bank's Monetary Policy Committee (MPC) believe the stubbornly-high inflation is being caused by temporary factors, such as spikes in commodity prices and January's VAT rise from 17.5% to 20%.
As the Chancellor's belt-tightening austerity measures start to kick in, the Bank will be under further pressure not to throw the fragile recovery off course.
Howard Archer, chief UK and European economist at IHS Global Insight, said: "Despite the undeniably significant risk to growth coming from the fiscal tightening that is now increasingly kicking in, there is mounting pressure on the Bank of England to enact at least a token near-term interest rate hike to send out the message that it has not taken its eye off the inflation ball."
But Philip Shaw, chief economist at brokers Investec, said a rate rise would put the recovery at risk. He said: "A sharp increase in rates certainly seems unjustified but any hike in rates at all now is potentially dangerous."
Brian Hilliard, economist at Societe Generale, said despite the pressures, he did not expect an interest rate hike next month.
He said: "The BoE has already predicted in the December minutes that the inflation rate would touch 4% in the spring so is unlikely to be bounced into a February rate increase by today's data or by January's, which should be provided to the MPC in time for that meeting."