U.K. inflation accelerated more than economists forecast to an eight-month high in December as fuel and food prices rose, adding to pressure on the Bank of England to raise the key interest rate from its record low.
Consumer prices rose 3.7% from a year earlier after a 3.3% increase in November, the Office for National Statistics said today in London. The median forecast of 31 economists in a Bloomberg survey was 3.4%. On the month, prices rose 1%, the most since records began in 1996.
The pound jumped after the report. Bank of England Governor Mervyn King will need to write a fifth consecutive public letter of explanation if inflation persists above the government’s 3% limit in next month’s data as higher sales taxes take effect. The bank’s markets director, Paul Fisher, said in a newspaper interview that inflation is "very uncomfortable," though it will probably peak in the first three months of 2011.
The pound rose as much as 0.5% after the data and was at 1.6007 Tuesday morning in London. The yield on the two-year government bond rose six basis points to 1.38%.
The monthly increase in prices in December compared with economists’ forecast for a 0.7%increase. So-called core inflation, which excludes costs of energy, alcohol, food and tobacco, rose an annual 2.9%.
Transport, including fuel, added the most to the monthly and annual price indexes in December, the statistics office said. Transport costs jumped a record 3.6% on the month and were up 6.5% on the year. Food and non-alcoholic drinks rose 1.6% on the month and 6.1% from a year earlier. The annual gain was the biggest since May 2009.
Retail-price inflation, a measure of the cost of living used in wage negotiations, accelerated to 4.8% in December from 4.7% the previous month, matching economists’ forecast. Excluding mortgage costs, inflation by that measure was 4.7%, the statistics office said.
The Bank of England’s Monetary Policy Committee held the key interest rate at a record low of 0.5% last week and its bond-purchase plan at 200 billion pounds ($319 billion U.S.). Minutes of the decision will be published next week and will show if Andrew Sentance maintained his push for higher rates, or Adam Posen kept up his call for more bond purchases.
Inflation is "very uncomfortable" though “I wouldn’t want to go back and change policy,” Fisher said in an interview with the Yorkshire Post newspaper, published today. “We can’t get over-concerned over the short-term inflation rate over which we can’t exercise any great control.”
Inflation averaged 3.4% in the fourth quarter, higher than the 3.2% forecast by the Bank of England in November. At that time, it predicted average inflation of 3.6% in the first quarter.
