Inflation jumps by a record 1%

19 January 2010 | By Natalie Thomas

Data released this morning from the Office for National Statistics shows inflation in the UK jumped from below the Bank of England target to marginally short of the upper limit of the target range in the largest ever increase in the annual rate of inflation between two months.

On the wider retail price index, prices also rose by 0.6% month on month in December, taking the annual inflation rate to 2.4%; the highest annual rate of inflation since November 2008 and, again, surpassing expectations of a rise to 2.1%.

The annual rate of inflation rose steeply from November’s 0.3%; the largest one month jump since 1979.

On the consumer price index, the largest upward contribution to the increase in the annual inflation rate came from transport costs, which rose by 8.7% year-on-year in December.

The main driver within this was a rise in fuel and lubricant costs – on the back of the doubling in the price of oil over the last twelve months. Fuel costs rose by 0.2% month-on-month but this compared with a 6.2% drop during the same period a year earlier.

Charles Davis, senior economist at cebr, says: “We expected the annual rate of inflation to rise relatively sharply towards the end of 2009 due to comparisons with steep declines in prices towards the end of 2008.

“Indeed, the latest figures compare with a period when prices were being cut to reflect the drop in VAT introduced at the beginning of December 2008 and it is quite possible that in December 2009 many retailers brought forward price rises ahead of the official January rise in the VAT rate. Hence, the short term volatility in the annual rate of inflation was expected.

“Nonetheless it will likely still force Mervyn King to write to the Chancellor to explain inflation’s rise above 3.0 per cent in January. However, lending growth is still subdued and earnings growth historically low so we expect inflation to fall back in 2010 as the steady recovery leaves plenty of spare capacity.”