U.K. Dec. Inflation Exceeds 2% Target; Logs Record Increase

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U.K. annual inflation exceeded the central bank's 2% target in December for the first time since May 2009 and rose to a nine-month high, official data showed Tuesday.

Consumer price inflation increased to 2.9% in December from 1.9% in November, according to a report released by the Office for National Statistics. That was the largest ever increase since records began. The annual rate stood above the consensus forecast of 2.6%. Month-on-month, consumer prices rose 0.6%, double the expected rate of 0.3%.

The ONS attributed the record increase to a number of exceptional events that took place in December 2008, namely the reduction in the value added tax to 15% and drastic decreases in oil prices. The VAT rate returned to 17.5% on January 1 this year.

The upward pressures to the change in the CPI annual rate in December were widespread with 10 of the 12 divisions having upward effects. The largest upward effects came from transport and clothing and footwear. At the same time, there were no significant downward pressures to the change in the CPI annual rate.

The core CPI that strips out energy, food, alcohol and tobacco climbed 2.8% annually in December, up from 1.9% in November. Consensus forecast for December was just 2.3%.

Capital Economics' Jonathan Loynes expects inflation to rise to 3.5% or above in January. But, the economist holds the view that the impact of the recession and the vast amount of spare capacity created will eventually bear down strongly on underlying price pressures.

The retail price index, which is used for indexation of pensions, stood at 218 in December compared to November's 216.6, indicating a monthly growth of 0.6%. Retail price annual inflation surged to 2.4% from 0.3% in the previous month. RPI inflation stayed above the expected 2.1%.

RPIX inflation that excludes mortgage interest payments stood at 3.8% in December, up from 2.7% in the prior month. The rate exceeded the consensus forecast of 3.5%.

According to Colin Ellis, an economist at Daiwa Capital Markets Europe, inflation could well breach 3% at the start of 2010, forcing the Bank of England Governor to write his sixth explanatory letter to the Chancellor. But, that is not a good reason for the MPC to start tightening policy, the economist said.

ING Bank's James Knightley also sees an above 3% inflation next month. According to the economist, in the next explanatory letter to the Chancellor, King 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 2010.

U.K. annual inflation exceeded the central bank's 2% target in December for the first time since May 2009 and rose to a nine-month high, official data showed Tuesday. (Market News Provided by RTTNews)