By Scott Hamilton Feb. 16 (Bloomberg) -- U.K. inflation accelerated in January to the fastest pace in 14 months as an increase in sales tax pushed the rate high enough to prompt a public letter of explanation from Bank of England Governor Mervyn King. Consumer prices rose 3.5 percent from a year earlier, the most since November 2008, the Office for National Statistics said in London today. A reading deviating more than a percentage point from the bank’s 2 percent target requires King to write to Chancellor of the Exchequer Alistair Darling setting out his plans to return to the goal. The letter will be published at 10:30 a.m. in London, the central bank said. King predicted last week that this bout of inflation will ebb as slack caused by the recession curbs consumer-price pressures. The Bank of England, which paused its 200 billion- pound ($314 billion) emergency bond-purchase plan this month, is bracing for volatile data in the aftermath of the slump at a time when the looming election clouds the economic outlook. “It’s clear that we’re in a period of inflation volatility, and we may see a further increase in the short term,” said Philip Shaw, chief economist at Investec Securities in London. “This is a big increase, but it was pretty well flagged. We’re not too concerned about the medium-term outlook for inflation.” The pound pared gains against the dollar and was trading at $1.5684 as of 9:54 a.m. in London. Government bonds stayed higher. The 10-year gilt yield was at 4.05 percent. VAT Rate Increase Inflation accelerated as prices of alcohol, tobacco, recreation, and bills at restaurants and hotels were pushed higher by Darling’s reversal of a 2.5 percentage-point cut in value-added tax last month. Transport costs also increased, climbing 11 percent on the year, the most on record. Retail discounts made in the depths of the recession a year earlier weren’t repeated last month while the pound’s decline of about a quarter on a trade-weighted basis in the past three years has pushed up the price of imports. The inflation rate matched the 3.5 percent median forecast of 30 economists in a Bloomberg News survey. On the month, prices fell 0.2 percent, the smallest drop for January since records began in 1997. Core inflation, which excludes costs of energy, food, alcohol and tobacco, accelerated to 3.1 percent in January, the fastest pace on record, the statistics office said. Economists had forecast 3.2 percent, according to the median of 11 predictions in a Bloomberg News survey. Short-Term Moves King said last week that the central bank can’t control short-term price moves as the pound’s weakness, higher commodity costs and the expiry of the sales-tax cut stoke consumer prices. Inflation will slow as low as 0.9 percent later this year and stay below the target as slack in the economy suppresses price pressures, the Bank of England said on Feb. 10. Today’s letter from King is the sixth since the bank was granted independence in setting interest rates in 1997. The governor said last week that it’s “far too soon” to say policy makers have finished buying bonds to aid the economy. “If inflation doesn’t start to fall back as rapidly as they project -- and by the middle of this year we will have an early sense of that -- that could be the point where their credibility starts to get tested a bit more,” said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. The retail price index, a cost of living measure used in wage negotiations, showed a 3.7 percent annual increase, compared with 2.4 percent the previous month. Excluding mortgage interest payments, prices rose 4.6 percent, the most since October 2008, the statistics office said. To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net.

Source