Page last updated at 10:06 GMT, Tuesday, 13 May 2008 11:06 UK

UK inflation jumps to 3% in April

Market stall selling vegetables
Many shoppers are already feeling the effect of higher food prices

UK consumer inflation reached its highest level in 13 months driven by high food and fuel costs, according to the Office for National Statistics.

The Consumer Prices Index (CPI) hit 3% on a yearly basis in April, up from 2.5% in March. The monthly rate was 0.8%, the biggest leap since May 2001.

According to the figures, the Retail Prices Index rose to 4.2% from 3.8%.

The inflation data would probably stop the Bank of England cutting interest rates in the near term, analysts said.

Analysts had expected CPI to reach 2.6%.

"It was a pretty horrific headline number," said Lee Hardman, an economist at BTM-UFJ.

"It limits the scope for monetary easing from the Bank, it will be hard for them to cut in June."

Letter

However, some analysts added that the main drivers of price growth were fuel and food costs, which higher interest rates did little to control or rein in.

In the current climate of slowing economic growth and a weakening housing market it was unlikely that the Bank would hike interest rates as price pressures were not being caused by an overheating economy, the analysts said.

The CPI figure is above the 2% target set by the government, and increases the chances that Mervyn King, the Bank's governor, will be forced to write to the Chancellor to explain the accelerating rate of inflation.

The Bank needs to explain why it is cutting rates when inflation is rising; a difficult but not impossible task
Ian Kernohan,
Royal London Asset Management

He has to write a letter to the Chancellor if the rate of inflation tops 3%, explaining the reasons behind the increase, the actions that are being taken, and a time-frame for bringing inflation back within target.

The governor has only had to write such a letter once before, and that was on 16 April, 2007.

The Bank "needs to explain why it is cutting rates when inflation is rising; a difficult but not impossible task", said Ian Kernohan, of Royal London Asset Management.

"The major concern remains inflation expectations since, if these remain elevated, the advantages we've enjoyed from low and stable inflation over the past decade may be lost," he added.

"This makes it a political as well as an economic problem."

Budget changes

Of the 12 types of goods measured by the CPI, seven categories saw prices rise in April compared with the previous month. Alcohol and tobacco were amongst the gainers after tax increases set out in the last government Budget.

Another significant reason for the higher inflation data was a sharp increase in electricity and gas bills after the six leading suppliers raised prices.

Higher power and gas costs contributed 0.2% to the increase in the CPI figure, the ONS said.

Consumers and companies are already feeling the effect of higher costs.

On Monday, data showed that manufacturing output dropped by its biggest margin in six months during April, with firms hit hard by rising raw material costs.

The Bank is due to release its economic forecasts on Wednesday.


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