UK inflation rate in surprise October increase

A sharp rise in fuel prices were a major reason for the surprisingly high inflation figure

The UK Consumer Prices Index (CPI) inflation rate rose unexpectedly to 3.2% in October, official figures show, on the back of higher fuel prices.

Analysts had expected the CPI figure to remain unchanged at 3.1%.

The news forced Bank of England governor Mervyn King to write again to the chancellor explaining why inflation has remained more than 1% above target.

Meanwhile, Retail Prices Index (RPI) inflation fell slightly to 4.5%, down from 4.6% a month earlier.

RPI contains a bigger share of housing costs, and is used to calculate many benefits payment and pensions.

Price changes

Higher fuel prices made a large contribution to the rise in inflation in October, according to the Office for National Statistics' statistical bulletin.

Prices for fuels and lubricants jumped 1.8% versus September, in part due to the higher road fuel duty that came into force on 1 October.

The good news for lower-income households is that food price inflation slowed down.

Meat prices were unchanged, thanks to a drop in the cost of pork products, while vegetable prices fell 1%, led by a big drop in the price of cauliflowers.

Annual producer price inflation also accelerated, to 4% in October from 3.8% in September, according to a separate report from the ONS.

The unexpected CPI figure caused the pound to jump marginally, rising 0.3% against the dollar to $1.608, before falling back again.

Letter exchange

"The current elevated rate of inflation largely reflects a number of temporary influences," said Mr King in his letter to the Chancellor, George Osborne.

He noted the rise of VAT to 17.5% in January, rising oil prices and increased costs of imports thanks to the weaker pound.

The surprise rise in inflation means the Bank of England continues to face a policy dilemma

"CPI inflation is expected to remain above target, and at a somewhat higher level than expected three months ago, for a period of a year or so," the Bank governor added, blaming a recent rise in global commodity prices.

"Indeed, over the next few months the inflation rate might rise further."

While emphasising repeatedly the uncertainty of the inflation outlook, Mr King said that the monetary policy committee's central view remained that spare capacity within companies and in the labour market would continue to put downward pressure on inflation in the longer term.

In his written response, the chancellor noted that most independent forecasters expected inflation to return close to the 2% target by 2012.

He also emphasised that the Bank had a duty to be vigilant against below-target as well as above-target inflation.

Balancing act

The news means the Bank of England continues to be posed with a policy dilemma.

The inflation rate has now remained above the 2% target by one percentage point or more for 11 months, and Mr King has had to write four letters to the chancellor this year.

But with the new government having announced the biggest round of budget cuts since World War II, the Bank still expects the resulting slowdown in spending to bring inflation down over the next two years.

The Bank's monetary policy committee (MPC) voted earlier this month not to change its current policy position.

In October's MPC meeting, two members dissented, with one wanting to tighten the money supply via a rate rise, while another wanted the Bank to loosen money by restarting quantitative easing.

QE on hold

"The Bank of England will be far from happy with the October consumer price inflation data," said Howard Archer, analyst at IHS Global Insight.

"But it is essentially in line with the projections contained in the bank's November Quarterly Inflation Report and is unlikely to prompt a near-term interest rate hike.

"However, the data are likely to reinforce the Bank of England's reluctance to re-engage in Quantitative Easing for now at least."

Meanwhile, the British Chambers of Commerce (BCC) called for the Bank to resist calls to raise rates.

"The available evidence still supports the Bank's assessment that after a temporary increase, inflation will come down significantly over the next 12-18 months," said David Kern, BCC chief economist.