It's a pretty big blip
It suggests to me that interest rates will inevitably start to rise from early summer onwards. The currency markets have already priced that in, which is why sterling is looking strong against most currencies (it's just gone over $1.60 as I write).
December's inflation rate means that the official inflation rate was over 3% throughout 2010 -- 50% more than the Bank of England's 2% target, which explains why the Governor keeps on having to write to the Chancellor to explain why he regularly overshoots his target.
Nobody who shops or pays household bills will be surprised by the rise in the CPI. Everything from oil (+25%) to fruit (+7%), fish (+11%) to supermarket food (+5%) has been rising strongly, often by much more than the CPI. The headline rate of the old Retail Prices Index (RPI) rose to 4.8% in December from 4.7% in November. Many regard the RPI a better guide to rising prices for most households than the CPI.
The Bank still insists -- as it has for ages -- that inflation is a blip and will soon come down. But with this month's Vat rise and commodity prices set to increase further, it's a pretty big blip -- and set to blip away for at least the rest of this year.
The City expects the CPI to go over 4% before coming down (some even expect it to get close to 5%, which would make for a massive RPI).
The political significance of this is clear: prices are rising strongly at a time when wage rises are weak or static. Add in the recent tax rises and it is clear that living standards for most families are falling.
No governments are re-elected on falling living standards which is why the coalition, whatever its difficulties and differences, knows it has to be in for the long-term.
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