UK inflation rate rises to 3.5% in March

James Knightley, Senior Economist with ING: Inflation rise "is temporary"

Inflation in the UK rose unexpectedly on the Consumer Prices Index (CPI) measure in March, driven by higher food prices and the cost of clothing.

CPI inflation rose to 3.5% in March from 3.4% in February, according to the Office for National Statistics (ONS).

Retail Prices Index (RPI) inflation fell slightly to 3.6% from 3.7%.

The ONS said that food and soft drink prices were 4.6% higher than in March 2011, when deep discounting took place in supermarkets.

It cited higher prices for bread, cereals, meat, fruit and vegetables in particular.

Clothing, footwear, DVDs and computer games also contributed to the rise.

However, gas and electricity prices were lower than a year ago after energy companies cut tariffs in February this year, whereas they raised them in February 2011.

The inflation figures measure the rate at which prices are rising compared with the same month a year ago.

The Bank of England's target for inflation is 2% on the CPI measure.

RPI and CPI are calculated using slightly different baskets of goods and services, with RPI including mortgage interest payments and council tax, for example, while the CPI includes the cost of university accommodation and fees for stockbrokers.

They are also calculated differently, using different mathematical formulae to take averages.

'Temporary'

March brought an end to five months of falls in the CPI rate, which had peaked at 5.2% in September last year.

The Treasury pointed out that inflation had fallen by a third since then and most commentators expected it to keep falling.

Details from inflation calculator

Vicky Redwood, chief UK economist at Capital Economics, said she expected the halt in the downward trend to be only temporary.

"Inflation should start to fall again before long, not least as last year's rises in energy prices continue to fall out of the annual comparison.

"We also expect core price pressures to ease as the economic recovery loses momentum again."

She added that the figures could reduce the chances of the Bank of England announcing more quantitative easing (QE) when its monetary policy committee next meets in May.

QE is the method chosen by the Bank to attempt to boost the economy. It buys assets such as government bonds, with the aim of freeing up cash for increased lending by commercial banks.

Analysis

A brief blip in a continuing downward trend? Or a setback which will cause headaches at the Bank of England?

That's the debate after the annual rate of inflation crept up for the first time since September.

Most City economists believe the underlying narrative remains the same - inflation falling steadily towards its target.

But questions are being raised about whether oil prices will derail the forecasts.

Fuel price rises in March nearly matched the increases in March 2011. Further increases could prop up inflation later in the year.

It had already expanded the stimulus by £50bn to £325bn this year.

However, while the Bank hopes QE will bolster growth, more money in the system also risks higher inflation.

The UK economy shrank at the end of last year and while most economists expect a return to growth in the first quarter of 2012, a shock drop in manufacturing output in February raised fears about the recovery.

Scotiabank economist Alan Clarke said the central bank faced a tough balancing act.

"In the context of the Bank of England, we are not growing and certainly not growing fast enough, and that argues for more QE," he said.

"But uncomfortably high inflation is a significant obstruction. So it is not going to be an easy decision for the Bank of England in May."

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