Hopes of rate cut fade as inflation overshoots

PRE-CHRISTMAS high street price rises pushed inflation above target for the first time for five months, according to figures released yesterday.

News that the underlying inflation rate hit 2.6 per cent in December, combined with evidence of returning consumer confidence, was poorly received in the City. Sterling rose to its highest level yet against the euro during afternoon trade amid fears that the Bank of England would hold fire on interest rates next month.

The Office for National Statistics said the rise in the underlying inflation rate was largely attributable to the increases in prices of seasonal food - such as potatoes - and household goods.

Analysts said the marked rise in prices of household goods was largely due to the "pre-January sales" effect. High-street retailers often raise prices before Christmas as this allows them to advertise sharp reductions at the start of the January sales.

The rise in prices of seasonal foods - which increased by 6.1 per cent in the month - was primarily caused by the poor weather, says the ONS. In the same period in 1997, seasonal food prices rose just 2 per cent.

City economists said the inflation figures - which also revealed that the headline rate sank to a seven-month low of 2.8 per cent - could provide the Bank with an excuse to leave rates unchanged next month.

However, several analysts emphasised that the overall trend in UK inflation was still downwards. Most expect the underlying rate to fall below target later this year.

Jonathan Loynes at HSBC Securities said: "We still expect RPIX [the underlying inflation rate] to drop below target as weaker costs push goods inflation into negative territory and slowing activity eases price pressures in services."

Fresh evidence of reviving consumer confidence also dented rate-cut hopes. GfK, the market research company, said confidence rallied in January following a string of interest-rate cuts by the Bank.

The GfK confidence barometer was minus 3 in January, up from minus 8 in December. Like other market researchers, GfK said that although consumers were gloomy about the general state of the economy, they were reasonably upbeat on the outlook for their personal finances.

GfK, which carried out its research on behalf of the European Commission, said there had been a sharp rise in employment intentions in businesses in the service sector.

There was fresh pressure on the Government yesterday to switch to an inflation target based on the harmonised European price index. It will be publishing this inflation measure alongside retail prices from next month.

Malcolm Bruce, the Liberal Democrat Treasury Spokesman, said the Chancellor should consider announcing the switch in his March Budget. The British Chambers of Commerce will also urge this move in its Budget submission.

Separate figures yesterday showed that the Government borrowed more than the City had expected last month. The Public Sector Net Cash Requirement (equivalent to the old Public Sector Borrowing Requirement) was pounds 3.2bn. But City experts still believe that the Government will easily meet this year's borrowing target of pounds 2.8bn.

Brazil raises interest rates

WORLD STOCK markets were shaken yesterday by the surprise increase in Brazilian interest rates on Monday night.

The central bank's decision to raise the prime lending rate from 29 to 41 per cent and the benchmark TBAN lending rate from 36 to 41 per cent achieved its aim of helping to stabilise the Brazilian currency. However, analysts warned of longer-term damage to economic growth.

Share prices fell in London and New York, where investors were worried by reports that seven Brazilian states were threatening to default on federal debts.

Brazilian share prices were trading modestly higher in relief that the central bank had stemmed the real's slide.

Alex Salmond said he accepted 'the democratic verdict of the people'
newsSNP leader says Scotland must move forward as 'one nation'
Arts and Entertainment
Friends is celebrating its 20th anniversary this year
tvSeries celebrates 20th anniversary
Yaya Touré (left) and Bayern Munich’s Spanish defender Juan Bernat
footballToure's lack of defensive work is big problem for City
voicesApple continually kill off smaller app developers, and that's no good for anyone
Arts and Entertainment
Liam Neeson said he wouldn't

Liam Neeson's Downton dreams

Wembley Stadium
footballNews follows deal with Germany
Arts and Entertainment
A spell in the sun: Emma Stone and Colin Firth star in ‘Magic in the Moonlight’
filmReview: Magic In The Moonlight
ebooksAn unforgettable anthology of contemporary reportage
A 'Sir Alex Feguson' tattoo

Arts and Entertainment
Ben Whishaw is replacing Colin Firth as the voice of Paddington Bear

Thriller is set in the secret world of British espionage

Life and Style

ScienceGallery: Otherwise known as 'the best damn photos of space you'll see till 2015'
Life and Style

Bomber jacket worn by Mary Berry sells out within an hour

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SQL Developer - Watford/NW London - £320 - £330 p/d - 6 months

£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Head of Audit

To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...

Audit Manager Central Functions

To £85,000 + banking benefits: Saxton Leigh: You will be expected to carry out...

Credit Risk Audit Manager

Up to £90,000 + benefits: Saxton Leigh: Credit Risk Audit Manager required to ...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week