By Marcus Leach

With energy prices soaring inflation rose above 5% for the first time in over three years.

The rate of 5.2% is equal to the highest it has been since the Consumer Price Index (CPI) measure was introduced back in 1997.

The news has been met with mixed reaction, as Graeme Leach, Chief Economist at the Institute of Directors, said the main focus needs to be on the long term inflation picture, not just today's (Tuesday's) figures.

"The first response to the latest inflation figures is 'ouch'," he said.

"The second response is more considered. The MPC always knew that inflation would head north of 5 per cent this year, but their main concern was the inflation outlook over the next two years.

"Hard though it is for many to believe, without QE2 the UK was facing deflation by 2013 because of the weakness of the money supply. Today's figures in no way undermine the MPC's decision to launch QE2. Don’t forget that in 2008/9, inflation fell from 5 per cent to 1 per cent in just 12 months.”

Elsewhere Jeremy Cook, Chief Economist at World First Currency Exchange, believes this is a turning point in terms of the squeeze on incomes.

“The news has been full of articles about increasing prices of late;" commented Cook, "from escalations by utility companies to ‘price wars’ between supermarkets.

“However, I think we are nearing a near-term high in inflation as the increase of VAT falls out of the figures in January.

“I am therefore of the belief that the squeeze on incomes from price rises will start to diminish as we move into 2012, although a consequent bounce in consumer confidence will be held back by a meagre 1.8% increase in wage prices.”

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