Pressure on the Bank of England to raise interest rates intensified today as UK inflation increased to its highest level in more than two years in January.
The Consumer Prices Index rose to 4% last month, from 3.7% in December, the Office for National Statistics (ONS) said, as the increase in VAT from 17.5% to 20% and the soaring cost of crude oil pushed up the cost of living.
Today's figure, the highest since November 2008, is double the British government's 2% target and is likely to throw weight behind the argument for hiking interest rates from a historic low of 0.5%.
The Governor of the Bank of England warned today that there was a 'great deal of uncertainty' over the outlook for inflation after the rate soared to its highest level in more than two years.
In a letter to Chancellor George Osborne, Mervyn King said inflation was likely to continue to pick up to between 4% and 5% over the next few months and admitted there were 'real differences of view' among bank policymakers.
The governor is required to write a letter of explanation to the Chancellor when inflation has been 1% or more above the Government's 2% target for three months in a row.
In his letter, Mr King said the high level of inflation was down to the rise in VAT, the low value of the pound and rising energy prices.
'There is a great deal of uncertainty about the medium-term outlook for inflation. And I do not wish to conceal there are real differences of view within the committee, reflecting different judgements about the risks to that outlook. Inflation is likely to continue to pick up to somewhere between 4% and 5% over the next few months ahead,' he said.
The governor said the MPC believes that pulling inflation back to target quickly could damage economic growth and would increase the risk of undershooting the 2% target.
Mr King said there was a risk that the high cost of living could increase inflation expectations and thereby pull up wages and other prices. 'Inflation is likely to remain above target for this year, before falling back in 2012,' he added.
After holding interest rates at 0.5% and the level of quantitative easing at £200 billion sterling at this month's meeting, Mr King said the bank's committee was 'conscious that there are large risks in both directions'.
