The Consumer Prices Index (CPI) annual inflation rate increased to four per cent in January, according to figures published today by the Office for National Statistics (ONS), putting more pressure on the Bank of England to increase interest rates in March.
CPI rose from 3.7 per cent in December, with the ONS citing the hike in both VAT and crude oil prices as primary reasons for the change.
Despite a growth in costs, British Retail Consortium (BRC) Economist Richard Lim said the latest BRC and Nielsen shop price figures indicate that the retail industry is not the main source of inflationary pressure.
Lim remarked: “Inflation is now running at four per cent and has been above the Bank of England’s target for more than a year now. By contrast, the Shop Price Index has stayed at around two per cent.
“Our figures show that food inflation is at a 19-month high. Despite that, overall shop prices are still rising more slowly than the official measure which includes petrol, utilities and services. Upward pressure on prices is not coming from the high street.”
Today’s government data shows that the main upward pressures to inflation came from petrol & diesel, restaurant & cafes, furniture & furnishings, alcoholic beverages and the purchasing of vehicles.
Meanwhile, the main downward pressures came from recreation & culture, banking services and clothing & footwear.
“The VAT rise had little effect on shop prices in January,” Lim added.
“The impact of the increase was almost entirely lost among the unusually high number of post-Christmas discounts and promotions.”
Lim’s comments mirror those of BRC Director General Stephen Robertson, who earlier this month said that most of January’s shop price inflation was absorbed by retailers.
However, he questioned whether the situation is sustainable in the months ahead and suggested that cost pressures are squeezing margins, meaning “retailers will struggle to go on absorbing it”.
With inflation moving ever-further away from the target level of two per cent, the Bank of England’s Monetary Policy Committee may be alerted into raising interest rates from the historic low figure of 0.5 per cent when it next meets at the start of March.
Retailers nationwide will not welcome such a move as it will further hamper consumers’ capacity to spend, but a rate rise may be on the horizon.