U.K. Inflation Rate Jumps Most on Record on Oil, Tax (Update1)

By Jennifer Ryan and Svenja O’Donnell
Jan. 19 (Bloomberg) -- The U.K. inflation rate jumped in December by the most since records began in 1997, posing a challenge to policy makers as they consider when to start raising interest rates.
Consumer prices climbed 2.9 percent from a year earlier, 1 percentage point more than in November, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 30 economists was 2.6 percent. The rate rose after oil prices jumped and 2008 cuts in sales tax and retail prices weren’t repeated.
This is the first time since May that inflation has exceeded the Bank of England’s 2 percent target, and economists say it may accelerate further in January. While officials argue that the rate will drop again this year, the figures put pressure on them to consider tightening policy as Britain recovers from the recession and braces for an election by June.
"We’re seeing a sharp jump in inflation," David Page, an economist at Investec Securities, said in an interview before the report. "The bank is going to start thinking about moving monetary policy away from emergency levels. There may be an increase in bank rate as soon as mid-year."
The pound extended gains after the data’s release, trading up 0.6 percent on the day at $1.6439 as of 9:33 a.m. in London.
The yield on the two-year U.K. government bond was up 12 basis points to 1.309 percent.

Sales Tax

Bank of England Governor Mervyn King will deliver a speech tonight in Exeter, England. The bank this month kept the benchmark interest rate at a record low of 0.5 percent.
The 1-point jump in the inflation rate was the biggest since comparable records began 13 years ago. On the month, prices rose 0.6 percent, double the median forecast of 27 economists in a Bloomberg News survey.
Finance Minister Alistair Darling on Jan. 1 reversed a cut in value-added tax to 15 percent implemented in December 2008, returning the rate to 17.5 percent. While Darling argued that it would stimulate the economy, David Cameron’s Conservative party objected to the reduction, saying it was a waste of money.
The parties are battling over economic competence as they campaign for an election that must happen by June. The opposition has a 9 point lead over Labour, according to a YouGov Plc poll for the Sunday Times published Jan. 17.

Oil Prices

Crude oil futures traded around $78 a barrel in New York yesterday, having doubled in the past year. Inflation also accelerated as high street discounts in the depths of the recession in December 2008 weren’t repeated, officials said.
Core inflation, which excludes costs of energy, food, alcohol and tobacco, accelerated to 2.8 percent in December, the fastest pace on record, the statistics office said.
The Bank of England forecasts inflation to accelerate before dipping below the 2 percent goal. The rate won’t return to the target until 2012, its predictions show. Policy makers will release new forecasts in February.
The central bank will decide whether to expand its 200 billion-pound ($326 billion) plan to buy bonds with newly created money next month, when they’ll have new quarterly growth and inflation forecasts. Policy makers will have spent the maximum allowed by the Chancellor before their Feb. 4 meeting.