UK inflation soars to 3.5pct, forces Bank of England letter

British inflation shot further above its 2 per cent target in January, though the Bank of England will almost certainly say the jump is temporary when it is forced to explain itself to the government later on Tuesday.

The Office for National Statistics said consumer price inflation rose to 3.5 per cent year-on-year last month from 2.9 per cent in December, its highest level since November 2008 and in line with analysts' forecasts.

Bank of England Governor Mervyn King will now publish a letter explaining why the central bank has missed its 2 per cent inflation target by more than a percentage point at 1030 GMT.

King got his excuses in early. He has warned inflation was likely to exceed 3 per cent this month, but said the central bank's greater concern remained the risk of inflation sliding below 2 per cent over the medium term, boosting expectations that interest rates will stay at record lows for most of this year.

Sterling rose and gilt futures pared gains after the data.

"Inflation was always going to spike in January due to the VAT hike and unfavourable base effects resulting from sharply falling oil and food prices a year earlier," said Howard Archer, economist at IHS Global Insight.

A reduction in value-added tax last year was reversed on January 1 while oil prices, now well of $70, were languishing just over $40 in January last year.

Like the BoE, most economists also expect much of the rise in inflation to be transitory, as weak growth and high unemployment should limit the ability of firms and workers to raise prices and wages.

"January's UK consumer prices figures should help to reassure the Monetary Policy Committee that the recent rise in inflation will prove to be only temporary," said Jonathan Loynes at Capital Economics.

He noted that core inflation, excluding food and energy, rose only from 2.8 to 3.1 per cent, a sign, perhaps, that "the vast amount of spare capacity in the economy is starting to weigh down on underlying price pressures".

On the month, consumer price inflation fell by the smallest amount on record for a January, dropping 0.2 per cent.

Besides the hike in VAT to 17.5 per cent, the ONS said the other main upward effect came from transport costs, given the rise in petrol prices and bad weather pushing up food prices. Cauliflowers alone added 0.04 percentage points to the all-items CPI rate.

The retail price inflation gauge rose to 3.7 per cent from 2.4 per cent, versus forecasts for a reading of 3.8 per cent.

RPI includes more housing costs than CPI, which matches the European Union Harmonised Index of Consumer Prices (HICP), and is used to index many social security payments and some wages.