Inflation rises on the back of VAT increases


The Consumer Price Index (CPI) rose last month to 4.1% from 3.7% in December.  The Retail Price Index (RPI), which includes mortgage interest payments, also rose, from 4.8% to 5.1%.

CPI is now double the Bank of England’s target of 2% and at its highest level since November 2008; it will lead for further calls for a rise in interest rates.

This rise has been blamed on higher fuel prices and the recent rise in VAT.

Following the inflation figures announced today Mervyn King, the Govenor of the Bank of England has been forced to write to the Chancellor, George Osborne explaining the reasons why inflation is so far above target. In his letter Mr King said he believed that inflation would rise to 5% later in the year but that it would then fall back. He further added that the factors behind the recent rate rise were outside of the Banks control.

Reactions to the latest figures were predictably mixed.

David Kern, chief economist of The British Chambers of Commerce  said, “considering an increase in interest rates before the middle of the year would be a mistake”

But Alan Clarke, economist at BNP Paribas, says the base rate may now rise in the coming months.

“My own view is that it will be just after the summer, but increasingly it’s looking more likely it could happen sooner rather than later – maybe as soon as May,” he said.

Saga, who focus on meeting the needs of the over 50’s called for an increase to interest rates as a way of helping its members savings keep pace with inflation.

The calls for interest rates to rise are bound to increase over the coming months and the Bank will need to walk a tightrope as it tries to balance the needs of business, savers, and borrowers whilst trying to meet its 2% inflation target.