Businesses in the UK have been hit hard by the record monthly increase in inflation, which has been driven by the rising cost of fuel and food, economists have warned.
According to the latest Office of National Statistics (ONS) report the Consumer Price Index (CPI) annual inflation, the government’s target measure, was 3.7% in December up from 3.3% in November, bringing inflation to its highest level since April last year.
Companies could be affected by the unexpected high inflation rate as it is likely to lead to workers’ demand for higher wages, economists have said, as the effects of the cutbacks and VAT increase are felt.
Analysts had predicted that CPI would rise by 1% in December and were surprised by the extent of the increase. Howard Archer, chief UK economist at IHS Global Insight, told The Guardian that December's data was "horrible".
"CPI at this level, and the prospect of further increases to come in the early months of 2011, is increasingly testing the Bank of England's nerve – and an increasing number of observers suggest its credibility – over its argument that inflation will fall back under 2% in 2012," he added.
Last year prices rose by 1% - marking the greatest increase during that period on record, compared to the normal increase of 0.4 – 0.6%.
However, the fact that many retail businesses did not increase prices ahead of January’s VAT rise to 20%, did not add to inflation, according to the ONS. The largest pressure affecting the change in CPI annual inflation came from the 1.6% increase in food prices, and a 2.8% increase in fuel costs, the data found.
© Crimson Business Ltd. 2011