Inflation hits 27-month high

Julian Harris
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INFLATION reached its highest rate since November 2008 last month, as escalating price pressures and tax hikes continue to hammer households suffering from sluggish wage growth and rising unemployment.

While inflation on the consumer price index (CPI) climbed 0.3 per cent to four per cent, the tax and price index (TPI) – which includes the effect of income taxes – surged to 5.5 per cent, the Office for National Statistics (ONS) said yesterday.

The TPI surpassed five per cent in April last year as tax hikes kicked in, and is now on the up again. Prior to 2010, TPI had not hit five per cent since July 1991.

The impending rise in national insurance will place more cost pressure on TPI, researchers at the ONS said.

The retail price index (RPI) – which also includes mortgage payments – also rose by 0.3 per cent, to hit 5.1 per cent.

The rise marked 14 consecutive months of CPI inflation being more than one per cent over the Bank of England’s target rate of two per cent CPI “at all times”.

And it was the first time in the history of the records that month-on-month inflation rose from December to January, the ONS said. Usually prices drop in January, due to high street sales.

Obliged to write another letter of explanation to chancellor George Osborne, Bank governor Mervyn King blamed Britain’s lingering inflation on VAT increases, global commodity prices and a weak pound.

Excluding these effects, inflation would “probably” be below two per cent, King said.

Core inflation – which ignores energy, food, alcohol and tobacco costs – rose to three per cent in January, closing in on the record high of 3.1 per cent seen last June.

Meanwhile, CPIY, which excludes direct taxes like VAT, jumped to 2.4 per cent. In two months CPIY has increased by 0.8 per cent. Some economists argue the CPIY should be even higher, as it assumes a stronger pass through of VAT than may be happening.

“There is a great deal of uncertainty about the medium-term outlook for inflation,” King admitted, revealing “real differences of view within the committee”.

“The Bank will be to continue to blame ‘temporary’ factors,” said Neil Prothero of the Economist Intelligence Unit, “but with inflation having exceeded three per cent in 24 of the past 34 months, the credibility of this argument is wearing thin.”