May 17 Inflation release by the Office of National Statistics (ONS), reported a larger than expected rise in annual inflation rate. The rate of inflation rose from 4.0% in March to 4.5% in April. Chart.1 shows that annual inflation is not too far from the September 2008 peak of 5.2 %
Chart.1 Inflation Historical Perspective
According to the ONS, the significant upward contributors to the annual rate of inflation were transport and household services. Transport costs were rose upward due to rising fuel and lubricant prices. Domestic heating costs and were the main categories that drove the cost of household services.
Chart.2 Inflation Rate Trending Upwards in the Past Year
Even shorter measures of inflation still show strong growth. Since bottoming in Q3 2010, both monthly and quarterly rates of inflation have accelerated.
Energy Prices continue to exert upward pressure on general prices in the UK economy. This inflation report may influence the Bank of England to act sooner. The latest Monetary Policy Committee minutes showed that 6 members voted against a rate hike, while 3 members voted in favour of hike. The doves were reluctant to raise interest rates due the fragility of the real economy, especially the household sector. The hawks feared that a sustained period of elevated inflation might result in medium term inflation expectations drifting upwards. This could result in demand for higher wages by employees.