Tuesday, February 15, 2011

The Office for National Statistics (ONS) have made a statement saying the inflation rate of the United Kingdom measured by the Consumer Price Index (CPI) increased to 4% in January 2011. In December 2010, this figure was 3.7%. According to BBC News Online, 4% is the highest CPI that the UK has experienced since November 2008.

There are various reasons for the raised British inflation rate, including value added tax (VAT) increasing from 17.5% to 20% on January 4 and the value of crude oil rising. The inflation rate of the Retail Price Index in the country has increased to 5.1%; previously, the value was 4.8%. The CPI has now been a minimum of a percentage point higher than the intended 2% target for one year and two months.

The ONS revealed that the price of petrol per litre, which the CPI measured at £1.27 (US$2.04, €1.51) (£5.77/ Imperial gallon), was a record peak. The rising values of tobacco, alcohol, hotels, restaurants, transport and furniture are also said to have caused the increase in VAT. Between December 2010 and January 2011, the rate of the CPI increased by 0.1%, the first time that inflation rose during these two months since records commenced in 1997. The ONS have stated that “[t]wo of the main factors that had an impact on the January data are the increase in the standard rate of Value Added Tax (VAT) to 20% and the continued increase in the price of crude oil”.

Mervyn King, the current Governor of the Bank of England, has written a letter and sent it to George Osborne, the present Chancellor of the Exchequer of the British government. The letter provides an explanation for the inflation outlook and what can be done to overcome it. Within the letter, King states that the inflation is anticipated to increase to 5% within the next few months.

“The MPC’s central judgement, under the assumption that Bank rate increases in line with market expectations, remains that inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead,” Mervyn King stated in the letter. “The MPC judges that attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term.”

During the last week, the UK interest rates remained at 0.5%. The Bank of England has kept this figure at half a percent for twenty-three consecutive months.