Business

UK inflation rate rises to 4.5% in April

  • 17 May 2011
  • From the section Business
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The UK Consumer Prices Index (CPI) annual rate of inflation rose to 4.5% in April, up from 4% in March.

The rise was due to a jump in transport costs, particularly Easter rises in air and sea fares, and alcohol and tobacco.

However, the Retail Prices Index (RPI) measure of inflation - which includes mortgage interest payments - fell slightly to 5.2% from 5.3% in March.

The rise in CPI was bigger than analysts had forecast and follows a surprise fall in the index last month.

CPI is now at its highest level since October 2008.

The Office for National Statistics (ONS) said "by far the largest upward effect" on prices came from air transport, where fares rose by 29% between March and April. Sea fares rose by 22.3%.

It said the fact that Easter fell much earlier last year and did not affect April 2010 CPI partly explained the jump in prices.

Alcoholic drinks and tobacco rose by a record 5.3% in April.

These price rises more than offset a 1.3% fall in clothing and footwear prices.

The Governor of the Bank of England Mervyn King was forced to write a letter to Chancellor George Osborne explaining why the inflation rate was more than 1% above the Bank's target rate of 2%.

He reiterated his view that high inflation was due to the "increase in VAT to 20% in January, higher energy prices and increases in import prices".

April was the 17th month in a row that the inflation rate was at least one percentage point above target, and the governor has to write to the chancellor every three months while it remains so.

Higher fuel bills

In March, inflation had fallen to 4% from 4.4% in February.

The return of accelerating price rises after March's respite will put further pressure on the Bank of England to raise rates sooner rather than later.

"April's rise in CPI inflation confirms that March's drop was just a temporary reprieve - inflation will probably get to 5% or above over the coming months," said Vicky Redwood at Capital Economics.

Last week, the Bank of England said it expected inflation to hit 5% later this year, largely due to higher utility bills.

It still expects inflation to fall back towards the Bank's target rate of 2% towards the end of next year.

The increasing pressure to raise rates following the jump in inflation was reflected in the currency markets, where the pound rose by more than half a cent against the dollar to $1.6285, and by almost 0.4 cents against the euro, to 1.1460 euros.

However, some analysts argued that this month's figures meant little in the context of longer-term price rises.

"Almost all of the pick-up in CPI inflation was due to higher transport costs caused by the timing of Easter, and this is likely to unwind next month," said Andrew Goodwin, senior economic adviser to the Ernst & Young Item Club.

"Abstract from this issue and the picture is little changed and there are few implications for policy."

He does not expect the Bank to raise rates before November at the earliest.

The Bank has resisted calls to raise interest rates - seen as the most effective policy tool in combating inflation - on the basis that temporary, external factors, such as rising oil and food costs, are driving price rises.

It believes raising rates would undermine the UK's fragile economic recovery.

For this reason, earlier this month it held rates at a record low of 0.5% for the 26th month in a row.

However, for the previous three months, three members of the Bank's rate-setting Monetary Policy Committee have voted to increase rates.

UK inflation rate

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