Spike in RPI inflation intensifies

Today's inflation data release from the Office for National Statistics reveals the following:

• RPI inflation rose by 2.4% over the 12 months to December 2009, up from 0.3% a month ago. The current spike in RPI is primarily driven by the sharp rise in fuel prices and the return to the 17.5% rate of VAT. The latter factor could risk a spell of stagflation (external website) - soaring inflation coupled with weak economic growth - according to CEBR research reported in the Daily Telegraph.
• Consumer prices index (CPI) inflation - the target measure employed by the Government to track inflation - rose by 2.9% in December, one percentage point up on the previous month's figure (1.9%). The target rate is 2%.

The current spike in inflation is entirely predictable (external website), and consequently should not cause undue concern, according to Sunday Times economics editor David Smith. Smith writes:

Why is inflation rising? Mainly because of what was happening a year ago. In the autumn of 2008 plenty of prices were falling sharply, including petrol and diesel, which dropped by a record amount between September and October 2008. The contrast between those falls and this year's modest rises is enough to produce a sharp rise in measured inflation.

Looking ahead, the spike should subside, although further volatility is in prospect. As Smith notes:

At the very least, just as the outlook is for a more unstable economy than in the long run-up to the crisis, so inflation will be much more volatile.

Latest inflation forecasts from expert commentators compiled by IRS also point to near-term volatility for RPI (subscription required). These forecasts indicate that RPI will continue to rise throughout the first half of the year , averaging 2.6% in the first quarter of 2010 and peaking at 3% in the second quarter. It will then fall back to 2.6% in the third quarter.