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The ONS said that higher transport, fuel and food costs had all pushed up inflation in December
UK inflation has surged to its highest level since April 2010 as the rising cost of food and oil continued to hit consumers and businesses.
December's unexpectedly high inflation rate put the Bank of England under even more pressure to raise interest rates, although City economists disagree about how soon borrowing costs will rise.
The consumer prices index rose to 3.7% in December, the Office for National Statistics reported. On a month-on-month basis, prices rose by 1% – the biggest increase on record.
The retail prices index, the wider inflationary measure used in pay negotiations, jumped to 4.8%, its highest rate since last July.
The pound gained half a cent against the dollar after the data was released, hitting an eight-week high of $1.6056. Alan Clarke, economist at BNP Paribas, predicted that the persistently strong inflation may push the Bank of England into raising rates earlier than previously thought.
Analysts had expected CPI to rise to 3.4%, from 3.3% in November, further away from the Bank's official target of 2%.
Howard Archer, chief UK economist at IHS Global Insight, said December's data was "horrible".
"In the words of Sir Alex Ferguson, this really now is 'squeaky bums' time for the Bank of England," Archer said,
"CPI at this level, and the prospect of further increases to come in the early months of 2011, is increasingly testing the Bank of England's nerve – and an increasing number of observers suggest its credibility – over its argument that inflation will fall back under 2% in 2012," he added.
The Bank of England's monetary policy committee has repeatedly blamed "temporary factors" for pushing inflation over target. However, the cost of living is rising more slowly in many other countries. Across the European Union, inflation was measured at 2.3% in November.
The MPC would have seen this inflation data when it met last week, and voted to leave interest rates unchanged at 0.5%. Archer predicted that the Bank would stand firm, and not vote to raise rates until the last quarter of this year.
George Buckley of Deutsche Bank, though, suggested that the MPC could vote for a rise "towards the middle of the year".
Rob Carnell of ING said that it was "all but impossible" for the Bank to engage in any more quantitative easing to stimulate the economy.
The ONS said that transport costs had risen by 12.9% during 2010. Food and non-alcoholic drinks gained 6.1% – with vegetable costs up by 8% – while restaurant and cafe prices, overall, rose by 3.6% over the year.
Paul Fisher, a member of the MPC, has insisted that it is committed to bringing inflation back towards 2%, in the medium term.
"We can't get over-concerned over the short-term inflation rate over which we can't exercise any great control," Fisher told the Yorkshire Post.
"It's uncomfortable having inflation above our target. But it's not what drives us from a policy point of view. We have to look at inflation two to three years ahead because that's what we can influence."
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