Record surge in UK inflation

Inflation jumped at a record rate in December, official figures showed today.

The Consumer Prices Index (CPI) hit 2.9 per cent last month - much higher than expected by the City - compared with just 1.9 per cent in November.

The surge was because VAT was unchanged last month compared with the Government's temporary cut to 15 per cent to help the economy a year earlier, the Office for National Statistics (ONS) said.

Far less discounting from retailers in the run-up to Christmas last month and unchanged fuel prices compared with sharp falls a year earlier added to the inflationary pressure, the ONS said.

The jump to 2.9 per cent in December is the biggest ever rise in the annual rate of CPI inflation in a single month, the ONS said.

The extraordinary factors take the CPI above the Bank of England's 2 per cent target for the first time since last May and make an open letter from Bank of England Governor Mervyn King to the Chancellor virtually certain when inflation figures for January are released next month.

This is because of the return of VAT to 17.5 per cent this month, which will add to inflation when contrasted with 12 months earlier when the tax was unchanged.

The Bank has forecasted a sharp spike in CPI at the beginning of the year, but the bigger-than-expected rise today may also prompt it to begin moving interest rates up from their current record low of 0.5 per cent earlier than expected by the market.

The ONS figures showed average petrol prices edging 0.2p higher last December compared with a 6p fall a year earlier, which was the second biggest monthly fall on record.

Clothing and footwear prices fell by far less than a year ago, when the temporary VAT cut came into price and many retailers were forced into early sales to tempt shoppers through the door during the worst point of the recession.

The Retail Prices Index, which includes mortgage interest payments, also jumped from 0.3 per cent to 2.4 per cent on the month. This is the biggest monthly rise in the annual rate since 1979.

Prime Minister Gordon Brown played down the inflation increase, saying it had been expected.

Speaking at a press conference in Downing Street with European Union President Herman van Rompuy, Mr Brown said: "I don't think we should read too much into one month's figures on inflation.

"Generally Britain has had for 12 or 13 years a low inflation environment that has made possible low interest rates."