The Office for National Statistics (ONS) released the figures for inflation in the UK on 15th February. The consumer prices index (CPI) was double the target level of 2.0 per cent, up from 3.7 per cent in December while the retail prices index (RPI) stood at 5.1 per cent compared to 4.8 per cent in December. The main reasons given by the ONS for the increases in both measures were the increase in value added tax (VAT), the increase in the oil price, which affected the price of fuel and the increase in fuel duty levied by the government.

The inflation figures prompted another open letter from the Governor of the Bank of England, Mervyn King, to the Chancellor of the Exchequer, George Osborne, in accordance with the remit of the Bank to maintain price stability at the target. Mr King wrote: "As I have described in previous open letters, three factors can account for the current high level of inflation: the rise in VAT relative to a year ago, the continuing consequences of the fall in sterling in late 2007 and 2008, and recent increases in commodity prices, particularly energy prices. Although one cannot be sure, prices excluding the effects of these factors would probably have increased at a rate well below the 2% inflation target."

Mr King went on to highlight the differences in the Monetary Policy Committee (MPC) about the future prospects for inflation and the degree of spare capacity in the economy. He noted that inflation was likely to reach 5 per cent in the months ahead. However, he hinted that any swift increase in Bank Rate would be unlikely given the economic conditions: "The MPC's central judgement, under the assumption that Bank Rate increases in line with market expectations, remains that, as the temporary effects of the factors listed above wane, inflation will fall back so that it is about as likely to be above the target as below it two to three years ahead. The MPC judges that attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term."

In his reply, Mr Osborne acknowledged the comments made by Mr King and noted: "I welcome the Committee's determination to bring the risks back into balance when required to ensure inflation returns to target in the medium term."