Fears were growing last night that Britain faces an explosion in the cost of living, with spiralling inflation threatening to erode savings and squeeze households already facing higher taxes.
The consumer price index (CPI) shot up in December at the fastest rate since the Office of National Statistics (ONS) began reporting it in 1996, the ONS revealed yesterday.
The spiralling inflation pours doubt on the Bank of England’s credibility after it yet again chose to keep interest rates at historic lows last week.
CPI inflation jumped by one per cent compared to November, pushing the annual level to 3.7 per cent – above the expectations of economists, who on average expected inflation of 3.4 per cent.
The retail price index (RPI), which includes some housing related and council tax costs, increased from 4.7 per cent to 4.8 per cent. The ONS said that depreciating house values stopped the measure increasing even further.
And the tax and prices index (TPI), which includes direct taxes, is up at 5.2 per cent, despite measuring just 3.2 per cent in January last year. On top of this month’s VAT hike, households will face another increase in National Insurance contributions from April.
Inflation continues to shock official forecasters, such as the government’s fiscal watchdog. In June the Office for Budget Responsibility (OBR) predicted inflation would average just 2.4 per cent this year.
And at the time of last year’s general election the Bank cited forecasts expecting inflation to drop to 1.8 per cent from April this year.
However, inflation has now been above three per cent for 12 consecutive months.
The ballooning prices were predicted by Simon Ward, chief economist at Henderson, who now expects inflation to reach 4.3 per cent by next month.
CPI inflation will likely remain above four per cent for the whole year, Ward said.
“The Bank should already have raised interest rates well beyond 0.5 per cent some months ago,” added Mark Field, MP for the City and Westminster.
“The inflation we are now witnessing comes as some of us feared as a direct result of the prolonged policy of quantitative easing (printing money),” he added.
The criticism was echoed by his Conservative parliamentary colleague Douglas Carswell, who described the UK’s inflationary dilemma as “hardly shocking.”
“If you print lots of new money with quantitative easing, you diminish the worth of the currency you already have,” Carswell said.
“It appears to be deliberate policy as a means of coping with the vast public debts we now face. As happened in the 1970s, inflation will be allowed to erode large public debts, but in doing so, diminish private wealth,” he added.
Suspicions over the use of inflation to erode government debt were voiced by a former senior Treasury official earlier in the month.
“A dose of inflation is one route forward for a bad overborrowed economy,” Sir Steve Robson said. “Certainly it is not evident what other route policymakers have in mind.”
But the Bank’s Paul Fisher insisted that inflationary effects are only short term and said the Bank is confident of reaching its medium term objectives.
“It is very uncomfortable,” he admitted, “but I wouldn't want to go back and change policy.”
GLOBAL AND LOCAL PRESSURES HIKING UP THE COST OF LIVING
Inflation in the UK will soon be twice the target rate, economists say
On 4 January VAT increased for the second time in a year
Petrol has hit £1.30 a litre as liquid fuel costs have surged
COAL AND STEEL
Australian floods are causing coal and steel prices to soar
Food costs hit their highest rate of inflation since May 2009
Food prices have seen restaurant and hotel fees also increase
Officials cited transport costs as a key element of inflation
Insurance prices rocketed earlier in 2010, for both home and car cover