British annual inflation hit eight-month peak last month

British annual inflation hit an eight-month high in December, official data showed yesterday, piling pressure on the Bank of England to begin raising interest rates from record-low levels, analysts said.

The 12-month inflation rate spiked to 3.7 per cent last month, driven by higher air fares and rising fuel and food prices, after 3.3 per cent in November, the Office for National Statistics said in a statement.

At 3.7 per cent, annual inflation stands far above the British central bank’s target level of two per cent. Market expectations had been for a smaller year-on-year gain of 3.4 per cent. Consumer Price Index inflation jumped by one per cent in December from November, the ONS added.

That was the largest ever month-on-month increase since records began in 1996. Analysts had predicted a rise of 0.7 per cent, according to Dow Jones Newswires.

The ONS said the biggest upward pressures last month came from air transport, fuels and lubricants, domestic gas and food.

Despite fears over high inflation, the Bank of England monetary policy committee last week voted to hold its key interest rate at a record low of 0.50 per cent for a 22nd month in a row. Its main task is to use interest rates as a tool to keep the annual inflation rate close to two per cent and thereby preserve the value of money.

Yesterday’s data “should add to MPC members’ inflation worries, making them less comfortable with the current wait-and-see stance,” said ABN Amro economist Joost Beaumont.

“We think that the MPC will shift into tightening mode in the coming months.”

Inflation is meanwhile expected to jump even higher this month after the British government hiked the rate of VAT at the start of the year. December’s data “pre-dates January’s VAT hike which makes it all the more concerning,” said Mark Bolsom, head of the UK trading desk at currency specialists Travelex.

“It will heap pressure on the Bank of England to raise interest rates.”

Yesterday’s data was published one day after an influential panel of economists called on the Bank of England to “hold its nerve” and maintain record-low rates, or risk Britain’s economic recovery.

The Ernst & Young ITEM Club, whose independent economists use the same forecasting model as the Treasury, said the BoE should sit tight since annual inflation would fall back to its two per cent target rate next year as temporary price pressures fade.

Other economists have argued that high British inflation could see the BoE embark on a policy of rate tightening as soon as the second quarter of 2011.

However, Investec’s Philip Shaw agreed that the fragile economic recovery must not be jeopardised.

“Any increase in rates at this stage would risk putting the recovery at risk... A sharp increase in rates certainly seems unjustified, but any hike in rates at all now is potentially dangerous.”