The Bank of England have announced that that UK Consumer Price Index (CPI), which does not include housing costs, rose to 3.5% in January from 2.9% in the month before.
The Retail Price Index (RPI), which does include housing costs, rose from 2.4% to 3.7%.
Whilst this is in line with expectations it still represents the fastest annual rise for the past 14 months and it means that the Governor of the Bank of England, Mervyn King has had to write to the Chancellor explaining why inflation had risen above the agreed target of 2%.
In his letter the Governor explains the reasons for the rise:
“First, the restoration of the standard rate of VAT to 17.5% is raising prices relative to a year ago. Second, over the past year, oil prices have risen by around 70%. That is pushing up petrol-price inflation significantly, which, in turn, is raising overall CPI inflation. Third, although the exchange rate has been broadly stable over the past year, the effects of the sharp depreciation of sterling in 2007 and 2008 are continuing to feed through to consumer prices.”
The letter went on to say that the rise in inflation is expected to be temporary and it should return to below the 2% target in the second half of this year even with historically low interest rates.
The news of higher inflation in the short term is not good for savers who are now being attacked from two sides, not only do they have to accept lower interest rates but inflation is now significantly eroding the return that they are actually getting. For example the most competitive instant access Cash ISA currently pays 2.75% (Source Investment Sense Best Buy Savings Accounts) with both the CPI and RPI above this level the real value of money is starting to be eroded.
Although the reasons for the inflationary spike are to be expected and somewhat historical, pointing to the fall later in the year predicted by Mervyn King, this will be of little comfort to savers in the short term who face a struggle to find interest rates that will preserve the real buying power of their money.