Inflation jumps to 3%

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The rising cost of living was revealed today with official figures showing the rate of inflation hit 3% last month.









The Consumer Prices Index (CPI) jumped from 2.7% in November due to increased fuel costs after petrol increased by 2p a litre in December following the rise in fuel duty.

The Retail Prices Index (RPI), seen as a more representative measure of the cost of living as it also includes housing costs, spiralled to 4.4% - the highest since December 1991.

The record figures gave an insight into why the Bank of England raised the interest rate to 5.25% in a shock move last week.

The Bank - which is charged with keeping CPI inflation at 2% - was shown today's figures before its decision.

The 3% CPI rise is just below the trigger level, which is more than 1% above or below the 2% target, requiring the Bank of England to publish an explanatory open letter to the Chancellor.

CPI inflation has now been above target for eight consecutive months, forcing the Bank into three hikes in interest rates in the past six months.

The Office for National Statistics (ONS) said on releasing the inflation figures that the 4.4% RPI increase was largely due to the November rate hike, which sent mortgage payments higher.

Electricity and gas contributed to the CPI rise, having now reached a 10-year high annual inflation rate of 30.2%, according to the ONS.

Furniture and household goods also saw the inflation figure jump, with prices of furniture showing their largest month-on-month rise in 10 years as retailers upped prices ahead of the January sales.

The cost of food and non-alcoholic drinks fell since November, as did the price of clothing and footwear.

January's inflation figure is set to come under further upward pressure from increasing energy bills imposed by Scottish and Southern Energy on New Year's Day.

The cost of a first-class stamp is due to rise by 2p to 34p in April, while mortgage rates will also increase following last week's interest rate rise.









James Knightley, an economist at ING Bank, said a further increase in the cost of borrowing was on the cards.

He said: "Given evidence suggesting that wage rises are picking up, there remains the real risk that the Bank of England will hikes rates again. We would expect any move to come in the next two months.

"Thereafter, inflation should start coming down quite quickly as last year's utility bill hikes start falling out of the annual comparison.

"We suspect that CPI will fall quickly enough to prevent the need for UK rates going above 5.5% and see lower rates later this year."





Martin Slaney, of GFT Global Markets, said: "This is the biggest headache the Bank has had for 10 years. The market is now facing the uncertainty of having to judge just how big the inflation problem is, and given that the CPI is generally a lagging indicator, we can expect inflation in the UK to climb further in the short term, taking us well above the Bank's 2% target.

"Although Bank of England governor Mervyn King will not be obliged to write that 'Dear Chancellor' letter just yet, his pen will be poised."







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