Page last updated at 11:40 GMT, Tuesday, 12 August 2008 12:40 UK

UK inflation up to 4.4% in July

UK inflation graph

The UK's annual rate of inflation rose to 4.4% in July, its highest level since records began in 1997.

The 0.6% rise was also the biggest monthly change since records began and took the figure to more than twice the government's target.

The rise in the Consumer Prices Index (CPI) was more than expected, with food prices up a record 13.7% on the year.

Inflation as measured by the Retail Prices Index (RPI) - often used in pay negotiations - rose to 5% from 4.6%.

Rates question

The latest figures are set to make the next interest rate decision by the Bank of England's Monetary Policy Committee even tougher, with the Bank having to cope with accelerating inflation and a slowing economy.

"It is very disappointing data with widespread signs of higher price pressures," said Philip Shaw, Investec chief economist.

The threats of recession are worsening
David Kern, BCC

Many economists expect that rates will have to be cut by 2009 if the economy goes into a tailspin.

Figures released on Tuesday suggested that the summer sales had made little impact in reviving retail sales, while house prices and mortgage approvals continued to tumble.

Stagflation

For the Liberal Democrats, Treasury spokesman Vince Cable warned about the dangers of stagflation.

"It's very clear that we're in for a dose of stagflation, with the economy slowing abruptly and inflation too high and increasing."

But Yvette Cooper, the Chief Secretary of the Treasury, said that inflation was a problem everywhere due to high oil prices and a lack of supply.

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Rising food and fuel prices have hit the Colquhoun family from County Durham hard

She said that the government had cut taxes by 4bn to provide short-term help to families, and was encouraging energy independence as the long-term solution.

Conservative Party leader David Cameron said the inflation figure was "yet another worrying signal for families desperately trying to make ends meet", adding that "the most important concern up and down the country is the deteriorating state of our economy".

While prices are still on the increase for consumers, economic activity is slowing in all key sectors of the economy, business confidence is waning and falling house prices and tight credit conditions have dented consumer spending.

Inflation drivers

The jump in inflation from 3.8% to 4.4% was the biggest monthly change in the annual CPI rate since records began in January 1997.

Food prices soared by a record 13.7% over the year mainly as a result of surging meat prices - particularly bacon, pork and poultry.

Meat in supermarket
Surging meat prices played a major part in driving inflation higher

High petrol prices also helped to push up inflation as the data was collected before the recent drop in oil prices.

Looking ahead, CPI inflation is expected to rise even higher as recent utility price rises take effect, with the International Monetary Fund predicting it could hit 5%.

The head of the biggest public sector union warned that his members were increasingly angry over the 2% pay deals imposed by the government.

"The government's unjust public sector pay policy means that (our members) are having to cope with the biggest rise in inflation since records began on a real pay cut," said Dave Prentis, General Secretary of Unison.

Interest rate hints

Experts will be eyeing the keenly awaited Bank of England's Inflation Report, due out on Wednesday, for indications of where interest rates are headed.

But, many analysts do expect some respite to come either late this year or early 2009 as price pressures ease up.

Figures released on Monday showed input prices for manufacturers fell by 0.6% in July, while oil and metals prices have fallen from their peaks in recent days.

The British Chambers of Commerce also warned that the Bank should move to cut rates as soon as possible.

"The threats of recession are worsening," David Kern, economic adviser to the BCC said.

"Although it is difficult for the Monetary Policy Committee to consider rate cuts while inflation is still rising, it should not hesitate to cut rates later in the autumn once it is clear inflation has peaked."




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