Inflation hits 4% in January

Inflation has hit 4% in January, up from 3.7% in December, Office of National Statistics data shows.

Two of the main factors that had an impact on the January data are the increase in the standard rate of VAT to 20% and the continued increase in the price of crude oil.

The largest upward pressures to the change in Consumer Price Index annual inflation between December 2010 and January 2011 came from fuels and lubricants, restaurants and cafes, alcoholic beverages, furniture and furnishings and purchase of vehicles.

In the year to January, Retail Price Index annual inflation was 5.1%, up from 4.8% in December.

The main factors affecting the CPI also generally affected the RPI.

In his letter to the chancellor of the exchequer explaining why inflation missed 2% target Mervyn King, governor of the Bank of England, says inflation is likely to continue to pick up to somewhere between 4% and 5% over the next few months, higher than previously thought.

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 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.

“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.

Jonathan Loynes, chief European economist at Capital Economics, says the figures are a relief given the potential for another nasty surprise this month.

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%.”