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Inflation to surge after VAT hike

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by Kay Mitchell

Leading business groups have warned that the recent hike in VAT from 17.5% to 20% will drive inflation up to around the 4% mark over the coming months.

This would take inflation to double the Government’s target of 2%.

Last month, the Office for National Statistics (ONS) revealed Consumer Price Inflation (CPI) rose to an annual rate of 3.3% in November, up from 3.2% in October.

The figure represents the highest since May and inflation has now been above its target for a year.

However, Governor of the Bank of England, Mervyn King, has previously said inflation could reach 3.5% – due to the VAT rise but expects inflation to fall below its target by early 2012.

The CPI inflation rate is a benchmark for the Bank of England’s Monetary Policy Committee (MPC) but the Bank has already noted that inflation has remained more persistent than it had expected but a hike in interest rates are not required at this time.

For seven months now, policymaker Andrew Sentance has voted for interest rates to be lifted from their current historic low of 0.5% to bring inflation down.

Inflationary pressures are expected to continue due to higher oil, gas and food prices.

The rate of VAT has been increased as the Government looks to raise billions of pounds in order to trim the UK’s budget deficit.

However, the new rate of 20% brings the UK into line with other European countries.

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News posted: January 5, 2011

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