UK Inflation Unexpectedly Hits 3.1%

The UK inflation rate surged unexpectedly to 3.1 percent in March, according to official figures. The unexpected acceleration of inflation has pushed the pound to $2 for the first time since September 1992 on increasing speculation interest rates will keep rising. The Consumer Prices Index (CPI), the official measure of inflation, shot up to 3.1 percent last month, more than 1 percent above the Government’s desired level for inflation. The cost of living has increased at its fastest rate for at least 10 years, compelling the Governor of the Bank of England to write a letter of explanation to the Chancellor for the first time.

This has also marked the first time in the history of the Monetary Policy Committee, the Bank’s rate-setting body created Gordon Brown 10 years back, that inflation has been more than 1 percent either ahead or behind the official target. However, according to the MPC rules, it means Mervyn King, the Governor of the Bank of England has to write to Brown, to explain that why the inflation rate is so far removed from the Bank’s target and what actions are being taken to resolve it.

The inflation hike though it has been unexpectedly high but it has been remain on cards amid considerable expansion in London’s financial-services industry, surging house prices and consumer spending that have encouraged growth in the UK economy, Europe’s second-largest. The Bank of England had earlier indicated in February that it may have to raise rates once more this year to bring inflation back to target and now it becoming increasingly imminent that there could upward revision of interest rates in coming may.

According to the statistics office, an increase in the cost of food, non-alcoholic beverages and furniture and household goods pushed up inflation in March. Interestingly, eight of the nine categories which determine the index contributed to the higher rate, with the single downward contribution came from housing and household services.