Britain's consumer price inflation rate rose to 3.5 percent in January from 2.9 percent in December, due to a hike in the national sales tax and more expensive energy, the Office for National Statistics said Tuesday.
The increase — the second largest on record — was expected. The Bank of England said last week that it believes inflation will drop back later in the year.
The Bank of England's governor, Mervyn King, said the higher rate was driven by higher sales taxes, higher oil prices and the lingering effects of a sharp depreciation of the British pound in 2007 and 2008.
"Over the past three years inflation has been much more volatile than in the preceding 10 years, reflecting an increase in size and frequency of these short-run factors," King said in a letter to Treasury Chief Alistair Darling. The governor is required by law to formally explain to the Treasury when inflation rises above 3 percent.
The statistics agency said retail price inflation rose to 3.7 percent from 2.4 percent in December, and retail price inflation excluding mortgage interest payments rose to 4.6 percent from 3.8 percent.
The main contributors to the January rise included an increase in the national sales tax from 15 percent to 17.5 percent, a 2.2 percent month-to-month increase in the prices of fuels, and higher prices for DVDs.
"Consumer price inflation could rise further in February as more retailers pass on January's VAT hike. However, that may well mark the peak and inflation should start to fall back in the second quarter," said Howard Archer, economist at IHS Global Insight.
December's annual increase in consumer prices was a full point higher than in November, the largest one-month jump on record.
The Bank of England's quarterly inflation report released last week predicted that inflation will spike to around 3.5 percent early this year, before falling back below the bank's 2 percent target in two years' time if interest rates rise as fast as markets predict.
Assuming interest rates start to rise in the third quarter of this year, as forecast by many economists, the bank forecast inflation at around 1.2 percent at the start of 2012. It added that even if interest rates stayed at the current record low of 0.5 percent, inflation would still be below target.
In a separate report, the statistics agency said output prices for manufactured goods rose 3.8 percent in the year through January compared to December's rate of 3.5 percent. Higher prices for petroleum products (up 21 percent), tobacco and alcoholic drinks drove the increase, the agency said.
Output prices excluding food, drinks, tobacco and petroleum were up 2.5 percent year-on-year in January.
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