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The BBC's Darshini David
"The jump in inflation could be short-lived"
 real 56k

Tuesday, 12 June, 2001, 11:09 GMT 12:09 UK
UK inflation hits two-year high
Underlying and headline inflation since 1999
UK inflation has reached its highest rate in two years on the back of rising food prices.

The Office for National Statistics (ONS) said that inflation - excluding volatile mortgage repayments - surged by 2.4% during the year to May, up from a rate of just 2% the month before.

The monthly increase in underlying inflation was 0.8%.

Assorted vegetables
Vegetable supplies have been hampered by wet weather
Although the annual underlying figure is still below the Bank of England's target of 2.5%, it dampens hopes of further interest-rate cuts in the near term.

"There is little latitude for the Bank's Monetary Policy Committee to cut rates from here," said Jeremy Stretch of Royal Bank of Canada in London.

The Bank of England left its key interest rate unchanged at 5.25% this month, after cutting it during the previous three months.

Consumer confidence

The data suggest that consumer demand is still buoyant.

"Retailers are putting up prices and consumers aren't walking away,'' said Robert Jukes, an economist at Credit Suisse First Boston.

A shopper in Sainsburys
Consumers are not 'walking away' from higher prices
The headline rate of inflation, which includes mortgage repayments, rose 0.6% in May, up 2.1% from a year earlier.

Mr Stretch described the jump as "an absolute surprise for the markets".

He added: "Most people will be surprised at the magnitude of inflation, not only the underlying measure, but also the headline number."

Data on Monday showed that wholesale prices also ticked up during May.

The higher cost of raw materials forced up prices at the factory gate.

Output prices in May climbed by 0.3% from the previous month - the biggest rise since last October.

Higher food costs

The largest pressure on inflation was higher food costs owing to the wet weather and poor growing conditions.

Supplies of vegetables, for example, have been hampered.

But ONS said the outbreak of foot-and-mouth disease had little impact on the figures.

Food prices climbed by 2.4% on the month, representing the largest rise since January 1982.

This contributed to a year-on-year rise of 5.3%, the biggest increase since September 1995.

However, Dharshini David, the BBC's economic reporter, pointed out that food prices tend to fluctuate, which means inflation could go back down.

Rising petrol costs also played a part in the latest figures, with pump prices up between one penny and 2p a litre.

Additionally, prices of household goods, particularly furniture and electrical appliances, applied upward pressure on the rate of inflation.

Prospects for June

Inflation could continue to rise in June with oil and petrol prices set to move up, following a decision by the cartel of leading oil producers, Opec, to leave production levels on hold.

A decision by the High Court to end the artificially high price of over-the-counter medicines is also expected to show up in the June figures.

News of higher inflation had little effect on the pound, which recently fell to 16-year lows against the dollar.

French inflation

French inflation also rose sharply in May - at the biggest rate for five years, according to provisional data from the French national statistics office on Tuesday.

Consumer prices increased by 0.7% in May - higher than expected - and reduced hopes that the European Central Bank would cut interest rates at its next meeting.

The latest figure brought the annual rate of inflation to 2.3%, lifting it above the maximum limit of 2% set by the ECB.

The jump in French inflation is also attributed to increases in fruit and vegetable costs, as well as higher oil prices.

French underlying inflation, however, remained steady at 1.5%.

By comparison with rest of Europe, UK inflation rates in Britain remain low.

Using European Union calculation methods, the harmonized index of consumer prices in the UK rose 1.7%, compared with 1.1% in April.

The EU average was 2.6%.

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See also:

11 Jun 01 | Business
High costs squeeze manufacturers
06 Jun 01 | Business
UK rates kept on hold
15 May 01 | Business
Medicine prices set to fall
05 Jun 01 | Business
Opec delays extra oil production
16 May 01 | Business
Eurozone inflation climbs
16 May 01 | Business
UK inflation to remain low into 2002
15 May 01 | Business
UK inflation remains steady
11 Apr 01 | Business
Rethinking inflation
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