The Office of National Statistics revealed that inflation increased by a record 1 per cent between November and December 2009, from 1.9 per cent to 2.9 per cent.
The ONS attributed the hike to low energy prices at the end of 2008, but the New Year VAT increase from 15 per cent to 17.5 per cent may have also helped raise figures and may continue to push up inflation above 3 per cent next month, according to Schroders European economist Azad Zangana.
While Zangana says that the Monetary Policy Committee will be at pains to raise interest rates too quickly, others warn this may lead to interest rate hikes to contain inflation.
Coreco director Andrew Montlake says: “More people than ever 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.
“If rates rise then these borrowers will find themselves with significantly higher monthly payments.”
Emba Group sales and marketing director Mike Fitzgerald says: “The low-rate party is nearly over and there is a strong expectation that rates will have to rise to make sure inflation stays dead, because inflation in a recession is really bad.
“The underlying trend will be one rising rates, it has to because we can’t stay this low forever.”
F&C analyst Ted Scott says: “Even a modest rise in rates could increase mortgage repayments considerably and make a meaningful economic recovery more difficult. It will also raise the cost of capital for the corporate sector but unlike some previous cycles companies are in reasonable financial shape.
“For the economy, the earlier tightening of monetary policy is not good news. Ultimately monetary policy will be predicated on how the economy performs so if we have a double dip recession or growth is very subdued any rise in rates will be very gradual.”
Caxton FX senior analyst Duncan Higgins says this morning’s CPI data saw Sterling jump, meaning interest rates may need to be raised sooner than expected in order to curb the upward trend.
He says: “While the economy has been in recession the Bank has kept its focus on returning the economy to growth, and deflationary pressures were the greater concern. Inflation now appears to be accelerating, which will support the need for the Bank to start tightening policy sooner than anticipated.”
Liberal Democrat Shadow Chancellor Vince Cable has allayed fears of any interest rate rises, branding today’s inflation figures a “spike”.
He says: “With inflation expected to fall quickly, it seems unlikely that the Bank of England would want to raise interest rates in the near future.
“Any recovery in the economy is still very fragile, it would be all too easy to destroy it by putting the brakes on too soon. However, the MPC still needs to be acutely aware of the longer term inflationary dangers.”