As Chancellor George Osborne puts the final touches to his Budget, inflation rises to its highest level for 28 months. It’s another hit for the “misery index”, as Economics Editor Faisal Islam writes.
The Consumer Prices Index (CPI) rose to 4.4 per cent in February from 4 per cent in January, due to increases in the cost of fuel, food and clothing – taking it to more than double the Bank of England‘s 2 per cent target and putting further pressure on the Bank’s Monetary Policy Committee (MPC) to raise interest rates.
The Retail Prices Index (RPI) measure of inflation, which includes mortgage costs, rose to 5.5 per cent from 5.1 per cent in January, its highest level for 20 years.
The Chancellor’s room for manoeuvre in tomorrow’s Budget is also constrained by the latest government borrowing figures, which were also published today. These show that public sector net borrowing hit £10.28bn in February, up from £8.1bn for the same month in 2010 and above economists’ forecasts.
There are calls for a rise in base rate, which has been kept at 0.5 per cent for two years. But the MPC has been cautious about an increase because of the fragile state of the economy. After coming out of recession, growth was minus 0.6 per cent in the final three months of last year.
These figures are not just high, they have again exceeded expectations, and again ramped up expectations of a rise in Bank of England base rates within weeks, writes Economics Editor Faisal Islam.
I went a step further. The concept of the "Misery Index" is a simple economic concept that adds the ills of inflation and unemployment together into a single measure of our financial despondency. Today's figures mean that in February 2011 it hit the highest level since Oct '92 just after Britain was forced out of the ERM (and the then Chancellor was advised by a young Tory hotshot called David Cameron).
The big picture here for me is that the numbers alone show that the recovery is far worse than being choppy: it is positively painful.
Read more on the misery index from Economics Editor Faisal Islam on his blog and check out his Facebook page.
Petrol and diesel prices hit record levels last month, up to £1.29 a litre and £1.34 a litre respectively. The Office for National Statistics (ONS) said the rise was driven by an increase in oil prices, which have been affected by events in the Middle East and North Africa.
The ONS said transport bills, which have risen by 0.8 per cent since January, were the biggest single factor in the CPI increase.
“We think that a rate rise will come in May.” BNP Paribas economist Alan Clarke
Economists said the figures made it more likely the MPC would raise base rate.
“They will have to push up their inflation forecasts in the next quarterly report (in May) and that will be ammunition for the hawks,” said BNP Paribas economist Alan Clarke. “We think that a rate rise will come in May.”
James Knightley, an economist at ING, said: “With higher fuel costs set to continue adding upward pressure, we see inflation pushing on to 5 per cent in the next few months, which will increase the pressure on the Bank of England to be ‘seen to be doing something’ on inflation.”