Economists' Reaction: U.K. Dec Inflation Jumps To 2.9%

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U.K. inflation moved above the central bank's 2% target in December, official data showed Tuesday.

According to the Office for National Statistics, annual inflation increased to 2.9% in December from 1.9% in November. The annual rate reached its highest level since March 2009. Economists were looking for an annual growth of 2.6%. Month-on-month, consumer prices rose 0.6%, while the expected increase was 0.3%.

Excluding energy, food, alcohol and tobacco, consumer prices climbed 2.8% annually in December, up from 1.9% in November. Consensus forecast for December's core inflation was 2.3%.

Economists' Reaction:

Colin Ellis from Daiwa Capital Markets Europe said, "Despite today's headline figures, we continue to believe that the relative strength of UK CPI inflation, compared with inflation in other countries, largely reflects sterling's past depreciation, the full impact of which has still yet to be felt."

"Despite this, today's data will raise fears that the spare capacity in the economy will not tame inflation, or that expectations may be deanchored," the economist noted. "The MPC must look through the current pick up in inflation, which reflects temporary relative price effects, and focus on broader underlying pressures, which still look weak. As such, although CPI inflation could well breach 3% at the start of 2010, forcing Governor King to write his sixth explanatory letter to the Chancellor, that is not a good reason for the MPC to start tightening policy."

James Knightley from ING Bank NV said, "Today's figure makes a 3%+ figure next month look certain given that we saw VAT return to 17.5% from the first of this month. Consequently BoE Governor Mervyn King will have to writie a letter to the Chancellor explaining why inflation has deviated by more than a full percentage point from the 2% target. It is easily explainable with the Chancellor getting much of the blame given the changes to VAT. The BoE will argue that this is temporary and that significant slack in the economy coupled with low wage growth will mean inflation will fall back through most of this year."

Jonathan Loynes from Capital Economics said, "December's consumer prices figures will do nothing to ease the recent increase in inflation worries, but they should not panic the MPC."

"We still think that the impact of the recession and the vast amount of spare capacity created will eventually bear down strongly on underlying price pressures - the lags are often very long. As such, we expect the MPC to look through the rise in inflation and leave policy unchanged. Still, with inflation set to rise to 3.5% or above in January - triggering a letter from Mervyn King to the Chancellor - inflation nerves will be sorely tested in the next few months."

(Market News Provided by RTTNews)