British inflation hits 17-month high

18th May 2010, Comments 0 comments

British annual inflation hit a 17-month high in April, official data showed on Tuesday, but Bank of England governor Mervyn King blamed temporary factors and forecast the figure would drop this year.

Consumer Price Index (CPI) annual inflation, the government's target measure, hit 3.7 percent last month for the highest level since November 2008, according to the Office for National Statistics (ONS).

April's rate compared with 3.4 percent in March, while market expectations had been for a rise to 3.5 percent.

Inflation jumped as clothing and food costs rose last month at a faster pace compared with a year earlier, according to the ONS.

The spike means that King was required to write a letter to new British finance minister George Osborne, explaining why annual inflation remains above the government's 2.0-percent target.

King wrote that inflation was also impacted by high oil and petrol prices, and the reversal earlier this year of a cut in the value added tax (VAT) levied on goods and services.

"The change in VAT and higher petrol prices will continue to be reflected in the overall price level," he said.

"But, unless they increase further, that should affect the twelve-month CPI measure of inflation for no more than a year."

He added that the depreciation of sterling was also pushing up consumer prices but noted that "the effects on inflation can be expected to wane over time".

In response, Osborne acknowledged that "a number of temporary factors have contributed to this elevated rate of inflation, including the VAT rate rise in January 2010 and high fuel prices.

"Clothing and footwear prices and duty increases for fuel, alcohol and tobacco have also contributed to the increase in inflation between March and April this year," he added.

The gloomy news comes one week after new British Prime Minister David Cameron rose to power in a historic coalition government of his Conservative party, of which Osborne is a member, and the Liberal Democrats.

Since September 2009, British 12-month CPI inflation has soared from 1.1 percent to last month's level of 3.7 percent.

Should inflation remain stubbornly high, Schroders economist Azad Zangana warned that the British central bank may be forced to hike interest rates from their current record low of 0.50 percent.

"This morning's inflation release can only be described as terrible and will come as a blow for the Bank of England which has continued to talk down inflation fears pointing to significant slack in the economy," Zangana said.

"If inflation does not fall as fast as the Bank of England hopes, and soon, then we are more likely to see a rise in interest rates this year."

On a monthly basis, the ONS said CPI rose 0.6 percent in April from March. Analysts had forecast a gain of 0.4 percent in this measure, according to Dow Jones Newswires.

The inflation data makes disappointing reading for savers who already face poor rates of return.

A basic rate British taxpayer now needs to find a savings account with an interest rate of 4.63 percent in order to inflation-proof their cash and prevent it from losing value in real terms.

British banks offer only 20 accounts which meet this requirement -- but they require savers to lock their cash away for an extended period.

"Rises in the rate of inflation continue to antagonise savers who are already struggling to achieve a competitive rate of return on their money," said Darren Cook, spokesman for comparison website

© 2010 AFP

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