Sharply higher petrol, gas and food prices have pushed inflation to "uncomfortably high" levels, ahead of City expectations, raising fears that the Bank of England may need to lift interest rates sooner than expected. The cost of motoring is about 17 per cent up on a year ago, and some food prices may spike further as a result of the no-fly zone restricting imports of some fruit and vegetables.
The Office for National Statistics (ONS) said yesterday that the consumer prices index rose by 3.4 per cent in the year to March, up from 3.0 per cent in February. The more familiar retail prices index (RPI), which also takes account of housing costs, rose by 4.4 per cent, up from 3.7 per cent. The RPI is at an 18-month high.
The spike in inflation will also further depress the real returns being offered to savers. The real return on an average no-notice account, after basic tax and inflation, today stands at minus 2.82 per cent, according to the price comparison website Moneyfacts.
Although still historically low, British inflation is markedly higher than in other comparable advanced economies. "Core" inflation, which strips out volatile items such as fuel and food, is also up, from 2.9 per cent to 3 per cent.
Consumer prices in March were up 0.6 per cent on February, far above the consensus of analysts. Some believe the RPI will return to 5 per cent when figures for this month are announced – a psychological barrier that may prompt higher wage demands.
The RPI is used in pay bargaining and for the uprating of social security benefits. Wage restraint has been one of the main reasons why the rise in unemployment has been less than expected, and policymakers will be concerned that this trend may now be threatened.
Underlying much of the jump in inflation is the weakness of sterling – down by about 25 per cent since its peak at the start of 2007 – and escalating world raw material prices. Oil, copper and other commodities are at recent highs. Poor weather in Spain has also helped to drive food prices higher. Even so, economists are disturbed by the consistent inflation overshoots.
Martin Gahbauer, chief economist at Nationwide, said: "The figures show inflation remaining uncomfortably high, presenting the [Bank of England's Monetary Policy Committee] with a delicate balancing act between supporting the economic recovery and preserving the credibility of the inflation target.
"So far the Bank has been able to point to temporary factors such as the VAT hike in explaining the spike in inflation above the target. However, the MPC may come under greater pressure to slowly and carefully raise interest rates from current emergency levels."
Higher than expected inflation may point to more rapid recovery. The latest jobs outlook report by the Recruitment and Employment Confederation shows a surge in employer confidence ahead of unemployment figures today. Ninety-six per cent of bosses surveyed said they expected their permanent workforces to remain static or grow.
GDP growth figures for the first quarter of this year will be published on Friday; a mild acceleration from 0.3 to 0.4 per cent is expected in the City.Reuse content