Hic! Rising cost of a tipple keeps inflation high

The rocketing price of spirits kept inflation stubbornly above 2.7% in January, with higher tobacco and food prices also requiring consumers to dig deeper into their pockets.

January’s annual consumer prices index (CPI) reading means the government’s preferred measure of inflation has been above the Bank of England’s 2% target for 38 months, having stayed at its current level for four months. The broader retail prices index (RPI) rose to 3.3% from 3.1% in December.

‘It is becoming increasingly expensive to drown one's inflationary sorrows,’ commented Nomura analyst Philip Rush of a 9% rise in alcohol prices. ‘Strong global demand for whisky has been creating shortages that may be finally starting to squeeze consumer prices.’

Utility prices and education costs also rose. Conversely, falling clothing and footwear prevented the overall index from moving higher.

Economists said inflation was likely to remain above target this year, possibly hitting 3%, but that this would not prevent the Bank of England from providing more economic stimulus if the UK economy continues to struggle. So far the Bank has spent £375 billion on bond purchases under its quantitative easing programme, but the economy remains subdued, having contracted by 0.3% in the last three months of 2012.

‘Forthcoming gains in petrol prices are likely to prevent any real decline in headline CPI inflation, which we expect will continue to average 2.7% this year – with a good chance that the CPI briefly picks up above 3% in the summer owing to an uneven pattern of price discounting,’ commented Allan Monks of JP Morgan.

Clues as to the monetary policy committee’s next steps will be provided tomorrow when the quarterly inflation report is published, a closely-watched update on the Bank’s forecasts for economic growth and inflation.

Michael Saunders of Citi said that Bank of England rate-setters shouldn’t actually attempt to hit their 2% inflation target in the face of rising utility bills. ‘The inflation remit should, in our view, be changed or interpreted very flexibly to allow the MPC to look through such tax-driven and regulatory-driven inflation for a long period,’ he commented.

But the elevated inflation rate, coupled with worsening savings rates being provided by banks, means savers will find it even tougher to maintain the value of their savings. Basic rate taxpayers now need a rate of 3.39% to gain benefit in real terms, increasing to 4.51% for higher rate taxpayers. There are only six easy access ISAs and one fixed rate ISAs available that beat inflation, according to data from MoneySupermarket.

See: 'Will poor cash ISA rates shock you into stocks and shares?'