UK consumer inflation rate rises to 4 percent

[February 15, 2011]  LONDON (AP) -- Britain's key inflation rate rose to 4 percent in January, according to official statisticians Tuesday, making it double the official target and adding pressure on the Bank of England to hike interest rates sooner than expected.

The report of higher consumer prices was in line with market forecasts and up from 3.7 percent a month earlier. The Bank of England's governor, Mervyn King, has argued that higher interest rates would be ineffective against inflation which he attributes to external factors including rising prices for energy and commodities.

However, at least two members of the nine-member rate-setting Monetary Policy Committee -- which got an advance glimpse of the figures for last week's policy meeting -- backed a modest hike in the key lending rate from a record low of 0.5 percent to 0.75 percent.

"Inflation is likely to continue to pick up to somewhere between 4 percent and 5 percent over the next few months," King said in a letter to Treasury chief George Osborne. King is obliged to write a letter of explanation when consumer inflation remains at 3 percent or higher for three consecutive months.

The largest factors in the latest increase were the higher price of oil and an increase in the broad-based sales tax from 17.5 percent to 20 percent, the Office for National Statistics said. Excluding the tax hike, consumer inflation rose from 2 percent in December to 2.4 percent in January, the agency said.

Other upward pressures came from restaurant meals, furniture, alcoholic beverages and the cost of vehicles, the agency said. Downward pressures came in the prices of recreation and culture, banking services, clothing and footwear.

"The data do nothing to change the dilemma facing the Bank, whereby short-term price pressures are encouraging some members of the Monetary Policy Committee to hike interest rates, but others fear a rate rise will threaten the fragile recovery," said Chris Williamson, chief economist at Markit.

Worries grew about the recovery following a recent report that the economy shrank by 0.5 percent in the fourth quarter.

"There is a great deal of uncertainty about the medium-term outlook for inflation," King said in his letter to the Treasury. "And I do not wish to conceal that there are real differences of views within the committee, reflecting different judgments about the risks to that outlook."

Jonathan Loynes, chief European economist at Capital Economics, noted the MPC would have had a preview of Tuesday's inflation report before deciding to keep the base rate on hold. He added that analysts will be looking for further clues on Wednesday when the Bank publishes its quarterly report on the inflation outlook.

The ONS said the wider retail prices index rose from 4.8 percent in December to 5.1 percent in January. The RPI excluding mortgage interest payments rose to 5.1 percent from 4.7 percent.

[Associated Press; By ROBERT BARR]

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.