Money Supply

Annual inflation has risen to 4 per cent in the UK, twice the Bank of England’s target. In the year to December, consumer prices rose 3.7 per cent.

VAT and crude oil were the main drivers of the change. Chris Williamson, chief economist of Markit, said: “Clearly, these factors are largely outside of the Bank of England’s control, and would not be affected by any change to interest rates. However, the data do nothing to change the dilemma facing the Bank, whereby short-term price pressures are encouraging some members of the Monetary Policy Committee to hike interest rates, but others fear a rate rise will threaten the fragile recovery.”

Month-on-month, the consumer prices index rose 0.1 per cent, the first time prices have ever risen between December and January – normally a quiet time as belts tighten and demand slumps after Christmas. Typically, the month-on-month change is a fall of 0.3 to 0.9 per cent.

VAT is thought to be behind the large rise in alcohol and tobacco prices, a main driver of today’s data. Restaurants and hotels were also affected by the VAT change. Transport was affected by both VAT and the price of crude oil. Price rises were offset in some part by significant (and typical) drop in clothes prices, thanks to the January sales.