Higher oil prices and VAT prompt inflation to hit 4%

Inflation hit 4% in January, up from 3.7% in December, the Office for National Statistics revealed last week.

Two main factors that had an impact are the rise in the standard rate of VAT to 20% and the contin-ued increase of crude oil prices.

In his letter to the chancellor explaining why inflation missed the 2% target, Mervyn King, governor of the Bank of England, says inflation is likely to rise to between 4% and 5% over the next few months. This is higher than expected.

He says: “That primarily reflects further pass through from recent increases in world commodity and energy prices.

“The Monetary Policy Committee’s central judgement, under the assumption that the Bank rate increases in line with market expectations, remains that, as the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead.”

Jonathan Loynes, chief European economist at Capital Economics, says the figures are a relief.

He says: “The rise in the headline rate from 3.7% to 4% was in line with the median forecast but lower than we had feared. We knew that food and energy prices would rise again, but core inflation ticked up only slightly from 2.9% to 3.0%.”