Financial and Business|

UK Inflation Rises to 4.5% after Bank Holidays

Office for National Statistics (ONS) LogoIn April, UK inflation hit the highest rate seen in 2-and-a-half years, according to the Office for National Statistics (ONS). This led Bank of England governor Mervyn King to write to Chancellor George Osborne to explain why the figure is higher than the target, despite the latest increase being most due to distortions from Easter falling later in April than usual.

Inflation rose from 4% in March to 4.5% in April, while the average forecast had been 4.2% and the Bank of England’s target is more than half that, at 2%. It was only a year ago that the bank estimated that inflation would be down to 1.7% by now. The jump in the annual rate will increase fears of stagflation, as prices rise quickly and the economy flatlines. However, most of the inflation surge last month is likely to be temporary due to the record increase in airfares during the holidays surrounding Easter.

Last year, Easter came at the start of April, which was too soon for the ONS’s mid-month survey to notice higher prices. However, there was a perfect storm of factors this year helping to increase airfares 29% in the month, according to ONS figures. The late Easter weekend fell amid school holidays and was close to many other bank holidays as well. This meant that more people were going on holiday during the last week of the month than normal, which helped drive up the cost of travel.

Out of the 0.5% rise in consumer price inflation, 0.36% of it has been attributed to airfare, international rail travel and sea travel. The 29% rise in airfares in April was much higher than the 1% fall during the same month last year, while there was also a 22% rise in sea travel prices compared to the 3% rise last year.

Because of this, King was prompted to write to Osborne for the 6th time since the start of last year to explain why inflation was still so high. He says that he expects inflation to increase more in the next few months due to increases in energy prices and utility bills taking effect. However, he thinks that as the impact of these one-off price increases diminishes, inflation will fall back to target. There has already been a sharp fall in commodity prices since a peak earlier this year, while oil prices are declining and reducing the chances of future inflation. However, the Bank of England predicts that inflation will pass 5% this year.

Economists have pointed out that inflation has been higher than the bank’s forecasts rather consistently and say that another month of more-than-expected price pressures will increase the chances of them rising rates. However, some reports indicate that, if or when there is a rate rise, it won’t happen until November.

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