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Last Updated: Tuesday, 16 August 2005, 10:11 GMT 11:11 UK
Petrol prices fuel inflation rise
Man filling car at petrol station
Rising crude prices have pushed pump prices ever higher
Transport prices drove UK consumer price inflation (CPI) to 2.3% in July from 2% in June, Office for National Statistics (ONS) figures show.

Surging crude prices drove fuel higher, taking CPI to its highest level since records began in 1997, the ONS added.

The stronger-than-expected increase is likely to reduce the chances of another cut in rates, experts said.

Headline retail price inflation (RPI) which includes housing costs, remained at 2.9% for a second month.

However, the underlying rate of RPI increased to 2.4% from 2.2% in June.

This does tend to underpin our view that the Monetary Policy Committee will leave rates on hold through to the end of this year
Philip Shaw, Investec

In its quarterly inflation report last week, the Bank of England had warned that inflation costs would rise above the government's target of 2% in coming months, before easing off.

The Bank added that CPI inflation was then expected to rise above the 2% level before the end of the two-year forecast period.

Inflation drivers

ONS figures showed fuel made up 0.13% of the rise in current figures - while sharp increases in sea and air travel costs also pushed inflation higher.

Meanwhile, furniture added to the increase as prices remained little changed compared to big cuts made at the same time last year.

The news prompted experts to question whether the UK consumer slowdown was as harsh as has been painted.

"Overall the non-food High Street added to CPI inflation rather than subtracting from it," said Geoffrey Dicks, economist at RBS Financial Markets.

"For all the moans and groans from the retail sector there is a distinct lack of aggression on (cutting) prices."

Alan Clarke economist at BNP Paribas added that "deeper than usual discounts" failed to materialise - contrary to reports that summer sales are lasting longer than usual and in contrast to reports showing the sector suffered a slump in July.

By contrast food prices had the "largest downward effect" on the figures as fruit prices - in particular those of strawberries and grapes - fell more than they did last year, the ONS said.

Interest rate concerns

Economists said the rise in inflation was likely to make the Bank think long and hard about another early cut in rates.

Earlier this month, the Bank's rate-setting Monetary Policy Committee cut interest rates to 4.5% from 4.75%.

"The inflation numbers are worse than expected," Philip Shaw, economist at Investec, said.

"This does tend to underpin our view that the Monetary Policy Committee will leave rates on hold through to the end of this year."

However, other analysts said that UK growth remained weak, and further rate cuts could be on the way.

James Knightley at ING Financial Markets said that inflationary pressures would ease, leaving "scope for further rate cuts in late 2005/early 2006".

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