UK inflation reaches 17-month high
Published 18/05/2010 | 12:36
UK inflation accelerated more than economists forecast in April to the fastest pace since 2008, enough to prompt a public letter of explanation from Bank of England Governor Mervyn King.
Consumer prices rose 3.7pc from a year earlier, compared with a 3.4pc increase in March, the Office for National Statistics said today in London.
Economists forecast a 3.5pc rate, according to the median of 27 predictions in a Bloomberg News survey.
With inflation above the government’s 3pc upper limit three months after the previous breach, King must now write to Chancellor of the Exchequer George Osborne to say what he will do to bring prices under control.
The Bank of England signaled last week that inflation may be peaking and will undershoot the 2pc target next year because of slack in the economy.
“Inflation is getting increasingly worrisome,” said Alan Clarke, an economist at BNP Paribas in London, in a telephone interview.
“The Bank of England will be concerned that expectations will be dislodged. If I was a betting man, I’d say inflation will be on the high side of the bank’s forecasts.”
The pound declined against the dollar and was down 0.3pc to $1.4437 as of 10.17am in London. Bonds fell, with the yield on the 10-year gilt rising 4 basis points to 3.78pc.
Inflation was the fastest since November 2008. The rate rose because of higher costs of food and women’s clothing, and tax increases on alcohol and tobacco, the statistics office said.
On the month, consumer prices climbed 0.6pc. Economists predicted a 0.4pc increase, according to the median of 21 forecasts in a separate Bloomberg News survey.
The report contrasts with comments from retailers, which have said that food inflation is slowing.
Morrison Supermarkets on May 6 reported a slowdown in sales growth as food prices slackened. Sainsbury Chief Executive Officer Justin King on May 13 said that the climate of “low-to-no inflation could well persist.”
Today’s letter will be the seventh since the central bank was granted independence in setting interest rates in 1997.
UK law requires the governor to write to the chancellor when inflation misses the 2pc target by more than a percentage point.
This will be the first exchange of letters between King and Osborne, who became finance minister last week.
The pound has lost about a quarter of its value on a trade-weighted basis since the start of 2007, stoking consumer prices.
The cost of crude oil rose 3.4pc in April and has climbed by about a fifth in the past year.
“Further adjustment to the lower level of sterling, or increases in commodity prices as a result of strong global demand, might cause inflation to remain above target for longer” than just the rest of this year, the central bank said in its May 12 inflation report.
“To the downside, spare capacity may exert a greater influence.”
Osborne’s June 22 budget may yet stoke prices if he raises sales tax from the current 17.5pc rate to narrow the record budget deficit.
Prime Minister David Cameron, in a May 16 interview with the BBC, refused to rule out an increase.
“The upside risk in the near term is that there’s a possibility of them raising value-added tax,” said Deutsche Bank economist George Buckley.
“Our forecast is for inflation to fall to about 2pc by the end of the year and assuming no increase in value-added tax, which I think is a very big assumption.”
Retail price inflation, a measure used to gauge the cost of living in wage negotiations, accelerated to 5.3pc in April, the fastest pace since 1991. Excluding mortgage-interest payments, it quickened to 5.4pc.