The UK Consumer Prices Index (CPI) inflation rate rose unexpectedly to 3.2% in October, official figures show, on the back of higher fuel prices.

Analysts had expected the CPI figure to remain unchanged at 3.1%.

The news forced Bank of England governor Mervyn King to write again to the chancellor explaining why inflation has remained more than 1% above target.

Meanwhile, Retail Prices Index (RPI) inflation fell slightly to 4.5%, down from 4.6% a month earlier.

RPI contains a bigger share of housing costs, and is used to calculate many benefits payment and pensions.
Price changes

Higher fuel prices made a large contribution to the rise in inflation in October, according to the Office for National Statistics' statistical bulletin.

Prices for fuels and lubricants jumped 1.8% versus September, in part due to the higher road fuel duty that came into force on 1 October.

The good news for lower-income households is that food price inflation slowed down.

Meat prices were unchanged, thanks to a drop in the cost of pork products, while vegetable prices fell 1%, led by a big drop in the price of cauliflowers.

Annual producer price inflation also accelerated, to 4% in October from 3.8% in September, according to a separate report from the ONS.

The unexpected CPI figure caused the pound to jump marginally, rising 0.3% against the dollar to $1.608, before falling back again.
Letter exchange

"The current elevated rate of inflation largely reflects a number of temporary influences," said Mr King in his letter to the Chancellor, George Osborne.

He noted the rise of VAT to 17.5% in January, rising oil prices and increased costs of imports thanks to the weaker pound.

"CPI inflation is expected to remain above target, and at a somewhat higher level than expected three months ago, for a period of a year or so," the Bank governor added, blaming a recent rise in global commodity prices.

"Indeed, over the next few months the inflation rate might rise further."

While emphasising repeatedly the uncertainty of the inflation outlook, Mr King said that the monetary policy committee's central view remained that spare capacity within companies and in the labour market would continue to put downward pressure on inflation in the longer term.

In his written response, the chancellor noted that most independent forecasters expected inflation to return close to the 2% target by 2012.

He also emphasised that the Bank had a duty to be vigilant against below-target as well as above-target inflation.
Balancing act

The news means the Bank of England continues to be posed with a policy dilemma.

The inflation rate has now remained above the 2% target by one percentage point or more for 11 months, and Mr King has had to write four letters to the chancellor this year.

But with the new government having announced the biggest round of budget cuts since World War II, the Bank still expects the resulting slowdown in spending to bring inflation down over the next two years.

The Bank's monetary policy committee (MPC) voted earlier this month not to change its current policy position.

In October's MPC meeting, two members dissented, with one wanting to tighten the money supply via a rate rise, while another wanted the Bank to loosen money by restarting quantitative easing.
QE on hold

"The Bank of England will be far from happy with the October consumer price inflation data," said Howard Archer, analyst at IHS Global Insight.

"But it is essentially in line with the projections contained in the bank's November Quarterly Inflation Report and is unlikely to prompt a near-term interest rate hike.

"However, the data are likely to reinforce the Bank of England's reluctance to re-engage in Quantitative Easing for now at least."

Meanwhile, the British Chambers of Commerce (BCC) called for the Bank to resist calls to raise rates.

"The available evidence still supports the Bank's assessment that after a temporary increase, inflation will come down significantly over the next 12-18 months," said David Kern, BCC chief economist.

http://www.bbc.co.uk/news/business-11764588

We're doomed!

Interest rates are being kept at a record low artificially and they're surprised that inflation is going up? Not to mention QE.

And all that QE is going to inflate commodity bubbles. Also the government want higher inflation as it reduces the impact of the public debt.

While interest rates are at 0% it also devalues my life savings. I've seen about a year of my life wiped out already

I do think that interest rates should be considerably higher at 4 or 5% at least. Then savings will be worth maintaining. As it stands the government are destroying the future for many, as well as incomes for pensioners now.

Yes but we can't have a property crash now, can we? All those poor little mites that overstretched themselves on their mortgages would be in trouble.

Yes but the corollary to them being bailed out is that pensioners lose income, first time buyers are still priced out of the over valued property market, people cannot get mortgages because the market is overvalued and everyone knows it but will not say. These people will still lose their homes in three years when prices still slide and they fall further into negative equity, and eventually hand the keys back. All it does is keep people believing that property is an investment, and keeps the tax payer on the hook to bail out the banks for another decade. The government are praying that the banks can trade their way out of trouble, but the potential losses are so great that they would bankrupt us like Ireland or Japan if we guaranteed them. It would be better if we ramp up rates to stomp on inflation and kill off any property speculation. This would give us long term stable property prices and mean that it would not be an issue if we rented or bought because real property prices will be the same next week or in twenty years time.

What is happening at the moment is that government policy is to drive people out of savings to spend it. Though they ignore the fact that people need a safety net. So they will move it from low paying deposits into higher risk assets to get a decent return. This increases the risk that these people are exposed to and when the stock market collapses by as much as 40% over the next decade or so they will impoverish millions, by wiping out many peoples life savings. My preference is for safe secure deposits which might be worth 10% less in real terms in a decades time, but that is much better than the 50% loss if stock-markets crash which I expect. All it does is allow the smart money to exit while the suckers climb aboard.