UK inflation rate rises to 4.5% in April

 

Watch: Phil Gooding from the ONS explains the factors behind the jump in inflation

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.

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"Choppy": it's the word that Mervyn King and George Osborne both like to use to describe Britain's recovery. It describes the inflation outlook as well”

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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.

Analysis

Another inflation shock, with City predictions of a 4.2% rate overtaken by the reality of 4.5% inflation, the highest since October 2008.

There were extenuating factors (there always are!). With Easter falling in late April, air, rail and ferry fares were much higher than they were in April the previous year.

Duty increases on alcohol and tobacco also had an upward effect. But with no fuel duty increase, inflation was lower than it might have been.

Whatever the factors at work, the underlying reality is the same - households are feeling the squeeze.

With pay rises running at about 2%, an inflation rate more than double that is cutting the spending power of consumers.

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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  • rate this
    +9

    Comment number 350.

    Hugh Pym says that pay rises are about 2%, so the more than double inflation rate is cutting the spending power of consumers. I wish I could get a 2% pay rise. Public sector workers, like me, are starting their 2nd year of a 2 year pay freeze, and there are plenty of us that are now getting clobbered as a result of the financial crisis and bad governance, and the bankers are still getting bonuses.

  • rate this
    -3

    Comment number 260.

    Another inflation figure and, surprise, surprise, inflation is high again for reasons which are just temporary. A bit overworked, that excuse?

    'Temporary' or not, interest rates now need to move upwards.

  • rate this
    +12

    Comment number 255.

    Am i the only one seeing big supermarkets and companies taking advantage, Yes the VAT rates have gone up, and yes fuel has gone up but not by the margins some supermarkets are whacking up prices. Something I Bought in November for £1.50 is now £2.00 with 20% less product...well over and above inflation, i'm seeing it more and more! It is perhaps THEM that are driving proces up! just a thought

  • rate this
    +16

    Comment number 231.

    I'm feeling the pinch but the problem started decades ago, when the govt started selling it all off. 'British' co's. sell out to the highest foreign bidder. A few (bosses) make a fortune. These businesses, their bank accounts and sadly the jobs go abroad. Learn from the Germans, whose govt keep a share in big industry, putting off any vultures out for a quick buck at the expense of the economy.

  • rate this
    +2

    Comment number 192.

    So inflation is going up by twice the average pay rise. This clearly isn't sustainable..Surely inflation will become self-limiting once people are squeezed enough to stop spending.
    I guess the only thing that raising interest rates will do is increase the cost of borrowing thus reducing spending power even more although I suspect rates would have to go up a lot to have any real effect. Look out!!

 

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