Inflation leaps to 3.5%

It has been revealed today that inflation jumped to 3.5% in January – 1.5 percentage points above the target.

In an open letter to the Chancellor, the Governor of the Bank of England, offered an explanation as to why the inflation level has gone off target:

“In the medium term, inflation is determined by the balance of money spending and the supply capacity in the economy. Money spending, in turn, is influenced by monetary policy, allowing the MPC to meet the inflation target. But in the short run, other factors, which cannot immediately be offset by monetary policy, can cause measured inflation to move around. Over the past three years inflation has been much more volatile than in the preceding ten years, reflecting an increase in size and frequency of these short-run factors.”

“Three such short-run factors have driven the current measured rate of inflation up. 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.”

Commenting on the rise, Liberal Democrat Shadow Chancellor, Vince Cable said:

“This figure is a stark reminder that despite the small growth in the economy at the end of last year we are still living in very uncertain times.”

“The Bank of England’s explanation of this as a temporary blip is welcome but there is a danger that inflation will stay high while growth remains low.”