VAT returning to its historic 17.5% rate and higher petrol prices drove up the Consumer Prices Index (CPI) of inflation last month and there may be more to come.
Meanwhile the Retail Prices Index (RPI), which includes housing costs, rose to 3.7%, up from 2.4% in December.
The governor of the Bank of England - Mervyn King – will by now have written a letter to the Chancellor explaining the increase and the measures that the Bank will put in place to return to the target rate of 2% [CPI].
The Bank of England had warned inflation could rise to 3.5% this year but predicts it will fall back below the 2% target later in 2010. However, RBS economist Neil Parker warned at a recent Economic Partnership/NatWest Bank event that inflation was “back with a bang” and may well approach 4% before the end of the year [see earlier story].
Professor David Blanchflower, until recently a member of the Bank of England’s monetary policy committee, has suggested that a spell of higher inflation would benefit the UK economy, suggesting that 4% would be a "pretty good starting point".
"You would actually end up inflating some of the debt away, but also if we get into a position where house prices were to fall further we are going to have a large number of people in negative equity, and if you have a few years of inflation that actually will deal with that problem."
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