Steady UK inflation calms rate rise fears

Falling food prices offset the rising cost of fuel

Fears of an early end to days of rock-bottom interest rates have been eased following new data which showed inflation in the UK unchanged at 2.3% in April from the month before.

Economists had worried that the rising cost of fuel, coupled with the continuing boom in the housing market, would push prices higher.

To get 2.3%, unchanged, in a month when you have a big boost from petrol prices is a result

Geoff Dicks
Royal Bank of Scotland

Petrol prices were 4p a litre higher in April thanks to oil price rises feeding through to the forecourt.

And the Bank of England's most recent report on inflation had said that inflation could hit 3% within two years.

But in the end a sharp fall in food prices as well as lower price tags on electrical goods outweighed a 5% jump in petrol costs, leaving the underlying rate - which excludes the cost of mortgages - unchanged.

"To get 2.3%, unchanged, in a month when you have a big boost from petrol prices is a result," said Geoff Dicks, an economist from Royal Bank of Scotland.

"If anything, the June camp" - the economists who fear a rate rise as early as next month - "are struggling as a result of these numbers," he added.

"We see rates going up in August."

The headline inflation rate - which includes mortgage costs - rose 0.2% to 1.5%, less than many economists had expected.

Last year's interest rate reductions in the face of the global slowdown have now dropped out of the 12-month period under review, lowering the baseline from which the rise is calculated and inflating the headline numbers.

Over-zealous?

The subdued inflation figures could counteract what some observers have felt is a tendency in the Bank of England to overcompensate for inflation.

UK underlying inflation

Sep 2001 2.3%

Oct 2001 2.3%

Nov 2001 1.8%

Dec 2001 1.9%

Jan 2002 2.6%

Feb 2002 2.2%

Mar 2002 2.3%

Apr 2002 2.3%

The Bank is charged by the government with keeping inflation to within a single percentage point of 2.5%.

For almost all of the past three years inflation has undershot 2.5%, and Sushil Wadhwani, a departing member of the Bank's Monetary Policy Committee, has accused his colleagues of systematically overestimating the threat.

If interest rates - currently at a 40-year low of 4% - had been a quarter-point lower over the past two years, growth would have been 0.5% better and inflation would still have stayed below 2.5%, he said.