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UK inflation hits 3.5% in January

The rate of inflation in the UK increased from 2.9% in December 2009 to 3.5% in January 2010 with the increase in VAT and higher petrol prices at the heart of rise. This will prompt a letter from the Bank of England to the Chancellor of the Exchequer explaining why the rate is well above the UK government's target rate of 2%. While the increase was forecast by many analysts it does give the Bank of England yet more problems to contend with, as there is a need to control inflation while giving consumers and businesses enough liquidity to pull away from the recession.

It will be interesting to see the details of the letter to the Chancellor of the Exchequer as it should contain a forecast for the short to medium term. Alistair Darling has responded to the increase in inflation suggesting this is a phenomenon appearing around the world as the worldwide economy moves out of recession and back into a growth phase.

While in a "normal economic environment" this sharp spike in inflation would tend to put upward pressure on base rates we are unlikely to see an increase in the short to medium term because liquidity in the market place is possibly more important than short-term inflationary considerations.

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