CPI inflation rose to 4 per cent from 3.7 per cent in January, double the Bank of England's target rate of 2 per cent following the increase in VAT and higher energy costs, whilst the RPI measure rose to 5.1 per cent from 4.8 per cent. The Consumer Price Index rose 0.1 per cent in January and in monthly terms this was the first time that prices have increased from December to January since records began in 1997. Economists had expected prices to increase by 0.3 per cent on the month. On an annual basis CPI came in on target, whilst RPI at 5.1 per cent was slightly lower than the 5.2 per cent expected by the market. Between December and January, petrol and other fuel prices increased by 4.4 per cent as Brent Crude moved nearer to $100 a barrel. The Bank's special pleading that inflation will fall back to target over the medium term is beginning to wear thin, particularly as it has consistently overshot the Bank's target during the past 5 years. The Consumer Price Index has been above 2 per cent, some 80 per cent of the time since the start of 2006, with the average being 2.8 per cent. The Governor consistently argues that there is significant spare capacity in the economy, which is known as the output gap. This is incredibly difficult to measure and it is my belief that the Bank of England is being far too optimistic about the level of spare capacity in the economy and this is a very serious judgment error.
Whilst on Wednesday Mervyn King was very keen to state that the wording of his letter, to the Chancellor the previous day, had not implied an interest rate rise was imminent, the problem with public letters is that they are read publically. When presenting the quarterly inflation report, Mervyn King commented that "some people are running ahead of themselves in saying that we are pre-announcing, or we are laying the ground for a rate rise, that decision has not been taken and it won't be taken until we get the next meeting or the following meeting", adding "it may be many quarters before we do anything". However, the reason the market had got ahead of itself was because the letter made it about as clear as it could that rates were on the way up. The Bank's famous fan chart showing CPI increases between 4 per cent and 5 per cent in the near term, before falling back to, or slightly below target, in 2 years time relies, the bank stated, on the premise that interest rates follow market expectations.
These expectations are for a quarter point rise in probably May, a quarter point rise in November and a further quarter point rise in January. Looking further out, the market currently believes that rates will end 2012 at 2 per cent and by the end of 2013 rates will be at 3 per cent. In the quarterly inflation report the Bank also lowered its growth forecast for the current year from 2.6 per cent to around 2 per cent and confirmed that inflation could reach 5 per cent and may be slightly more before June. Under the Bank's central prediction, therefore, rate rises look imminent.According to the AA on Friday UK Petrol and diesel prices are at a record high because retailers are not passing on cuts in the wholesale market. Average petrol prices have reached an all-time high of 128.81p a litre up 0.54p a litre from mid-January. Diesel has also hit a new record of 134.01p a litre - a rise of 1.26p over the last month. The AA says if 2p drop in the cost of petrol had been passed on to UK motorists, most of the impact of the VAT rise in January would have been wiped out. The motoring organisation has repeated its call for a published track of wholesale and pump prices, as is available in the US, Australia and South East Asia.
