November 17, 2009 / 9:36 AM / 10 years ago

Inflation jumps to 1.5 percent in October

LONDON (Reuters) - The inflation rate accelerated in October after a sharp fall in transport costs last year was not repeated, official data showed on Tuesday.

The skyline of the financial district of the City of London is seen behind workers crossing Waterloo Bridge during the evening rush-hour in central London October 16, 2008. REUTERS/Toby Melville

The Office for National Statistics said consumer price inflation rose to 1.5 percent year-on-year last month, in line with the consensus forecast, from a five-year low of 1.1 percent in September.

The figures are unlikely to cause undue concern to Bank of England policymakers whose quarterly forecasts last week pencilled in a sharp pick-up in near-term inflation before it eases back below the central bank’s 2 percent target to around 1.6 percent in the medium term.

“I don’t think this is anything that will worry the Monetary Policy Committee too much,” said Amit Kara, economist at UBS. “The MPC has highlighted that inflation is going to be very volatile in the near term.”

Some economists reckon inflation could even hit 3 percent at the start of next year as a temporary cut in value-added tax is reversed.

The pound rose a quarter of a cent against the dollar and hit a two-month high against the euro after the figures, extending gains after Bank policymaker Andrew Sentance sounded an upbeat note on Britain’s recovery prospects.

Bank Governor Mervyn King said last week that the central bank had an open mind on the need to pump more newly-printed money into the economy, days after it raised its asset-buying programme by another 25 billion pounds to 200 billion.

“While such a spike (in inflation) is expected to prove a temporary affair, it is hard to reconcile the Bank rolling out quantitative easing yet further in February hot on the heels of CPI potentially returning to letter writing territory,” said Richard McGuire, fixed income strategist at RBC.

The central bank targets consumer price inflation at 2 percent and any deviation of more than a percentage point from this requires King to write an explanatory letter to the government.

The ONS said October’s pick-up was due to the statistical impact of a record fall in fuel prices in October 2008 not being repeated this year.

The largest upward effect within transport came from fuels and lubricants where prices fell by 0.7 percent on the month in October but fell 6.1 percent last October.

The price of second-hand cars rose at the fastest annual rate on record at 13.2 percent. Air fares also put upward pressure on the index.

Retail Price Inflation, a gauge that includes housing costs and is used as the basis for many wage deals, came in at -0.8 percent from -1.4 percent in September.

Editing by Mike Peacock

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