Petrol prices fuel surge in inflation

Headline rate up to higher than expected figure of 1.9 per cent from 1.5 per cent
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The Independent Online

The rising price of petrol was yesterday blamed for an unexpectedly sharp rise in the Consumer Prices Index to 1.9 per cent during November.

It is the CPI's highest level since May, and compares with a figure of 1.5 per cent in October. Economists had expected a rise, but only to 1.8 per cent.

Significantly the Retail Prices Index, which includes housing costs, also rose, to 0.3 per cent compared with a rate of minus 0.8 per cent recorded in October. It is the first time the RPI index has been in positive territory since January.

Economists, however, said they did not expect the surprisingly steep rise in inflation to change the Bank of England's policy of keeping interest rates at the current all-time low of 0.5 per cent.

The Bank has warned that there could be further rises in inflation in the months ahead and that its 2 per cent target is likely to be breached as a result. CPI inflation is likely to be fuelled as the temporary 2.5 per cent cut in VAT, designed to help stimulate the economy during the worst of the recession, is removed in the new year. Fuel prices are also expected to rise further. If the CPI goes above 3 per cent, the Bank's Governor, Mervyn King, will again be required to write to the Chancellor with an explanation.

However, the Bank has also said that the longer-term outlook for price rises is expected to be "subdued", not least because of the torpid state of Britain's economy, with any recovery over the coming months expected to be slow, a situation not helped by the requirement of a future government to cut Britain's yawning public sector deficit.

Howard Archer, chief UK and European economist at IHS Global Insight, said that while the rise in inflation was greater than expected, it should still moderate over the longer term in line with the Bank's expectations.

He also said that the figures did not rule out yet another injection of cash into the economy as part of the Bank's programme of "quantitative easing". However, Mr Archer does not expect such a move, particularly if GDP figures show a return to growth in the fourth quarter, as expected. In November the programme – which has colloquially been likened to "printing money" – was extended by a further £25bn to £200bn.

Mr Archer said: "The Bank of England has indicated that it will look through the near-time spike up in inflation and will focus on price prospects over the longer term. Given that November's further spike up in inflation was broadly in line with the Bank of England's expectations, it does little to dilute belief that interest rates will stay down at 0.50 per cent until at least the final months of 2010. It also does not rule out the Bank of England further increasing its quantitative easing programme, although we believe that this is unlikely to occur unless the economy suffers a serious relapse in 2010."

Nonetheless, Royal Bank of Scotland has raised its forecasts for CPI to peak at 2.9 per cent in March, up from 2.7 per cent before yesterday's figures. The bank's economists also expect a sharp rise in CPI during the current month. They forecast that it will come in at 2.5 per cent. They yesterday warned of "upside risks in late 2010 if VAT/duties [are] raised in any "austerity Budget".

The Conservatives have promised an "emergency budget" if they win the forthcoming general election in the new year.

On the figures, the Office for National Statistics said: "By far the largest upward pressure affecting the change in the CPI annual rate came from transport. Within the transport category the largest upward effect came from fuels and lubricants. The large fall in 2008 was due to sharp falls in petrol and diesel prices, reflecting the falling price of crude oil in the latter half of 2008."