According to the Office of National Statistics, the Consumer Price Index recorded its biggest jump since records began in 1997.
The retail price index is also estimated to have risen sharply, up from 2.1 per cent in November to 2.4 per cent in December 2009.
The Government figures reveal that the sharp pick up is largely attributed to energy price falls at the end of 2008, but the cut in VAT from 17.5 per cent to 15 per cent in December 2008 also played a large part. Bank of England governor will have to write to Chancellor Alistair Darling this month and explain why inflation has risen past the Monetray Policy Committee’s target of 2 per cent.
Schroders European economist Azad Zangana says economists will be concerned to see that core inflation, which excludes volatile energy and food prices, increased to 2.8 per cent over 2009 despite the UK experiencing the longest and deepest recession in 70 years.
He says: “This morning’s shock will put inflation firmly back on the agenda, especially as next month’s inflation figure will rise above 3 per cent and trigger a letter from the Bank of England to the Chancellor to explain why inflation has once again risen above their 2 per cent target.
“Whilst the latest inflation estimates are a surprise, we do not expect the Bank of England to panic and raise interest rates. This should spell the end of quantitative easing in February, but worries over growth and rising unemployment will keep the monetary policy committee in ‘wait and see’ mode for some time.”
Corceo director Andrew Montlake warns that this is a “real shot across the bows” for mortgage borrowers, many of whom are on variable rate mortgages at present, either because they cannot remortgage or because they have decided not to given the discount on variable rates relative to fixed.
He says: “If rates rise to contain inflation then many borrowers will find themselves with significantly higher monthly payments.”