UK inflation rises after energy price hikes
Soaring energy bills lifted inflation to a seven-month high last month and above the Bank of England's target of 2%, official figures showed today.
The Consumer Prices Index (CPI) rate of inflation rose to 2.2% in May, up from 2% in April.
Chancellor Gordon Brown pledged to be “resolute in our anti-inflation discipline” as the data from the Office for National Statistics showed inflation at its highest rate since October last year when it hit 2.3%.
Fears over the impact of rising inflation have played havoc with stock markets around the world in recent weeks, with London’s FTSE 100 Index among those hit.
Today, it slid more than 100 points following a bloodbath in Tokyo overnight where the Nikkei index lost 4% as investors continued to worry about higher borrowing costs.
But economists predicted there would be no imminent rise in interest rates in the UK as inflation was being almost entirely driven by the rising costs of gas and electricity bills.
Core inflation – which strips out energy prices actually fell from 1.3% in April to just 1.1%. As energy price hikes drop out of the year-on-year figures inflation should fall back to 2%, experts predict.
The Bank’s Monetary Policy Committee (MPC) sets interest rates every month in order to keep inflation at 2% over a two-year period.
Today’s figures were announced hours after the Bank’s Governor Mervyn King warned that the global economy was facing a “bumpier stretch of the road”.
But he said the UK could take some comfort from the fact that, despite sharp increases in energy prices, both consumer price inflation and inflation expectations had remained close to target.
John Butler, economist at HSBC, said overall today’s update was “neutral for the interest rate debate”.
“The headline measure is up and the MPC, as a result, will continue to fear this feeding into higher inflation expectations,” he said. “But as yet there is still no evidence of any second-round effects.”
Dominic Walley, managing economist at the Centre for Economics and Business Research, said: “Energy price hikes last year will start to drop out of the year-on-year figures in the next few months and lead us back towards the 2% target.”
Central banks in Europe and Asia raised benchmark interest rates last week and the US Federal Reserve has done so 16 times since June 2004 but the MPC kept them pegged at 4.5% last week for the tenth month running.
Speaking at an Islamic trade and finance conference in London today, the Chancellor said the Government would maintain its vigilance against inflation.
“British inflation remains lower than 2.5% inflation in the euro area and 3.5% in the USA,” he said.
“We will be resolute in our anti inflation discipline. I have already made it clear that just as public sector settlements are this year averaging 2.25%, in the next year and future years public sector pay settlements should be founded on our inflation target of 2%.”
Malcolm Barr, economist at JP Morgan, said he continued to forecast a move up in rates in November but added a change in the MPC vote beyond 7-1 in favour before they meet in August “would probably be enough to tip us toward pulling that forecast forward to August”.
The underlying rate of Retail Price Index (RPI) inflation rose from 2.4% to 2.9% last month, while the headline rate of RPI inflation, which includes mortgage interest payments, rose from 2.6% to 3% in May.
