Britain's inflation rate jumped the most since 2002 in April, making it harder for the Bank of England to support economic growth by cutting interest rates.
Consumer prices climbed 3 percent from a year earlier, compared with 2.5 percent in March, the Office for National Statistics said today in London. The result was the highest in 13 months and exceeded the 2.6 percent median prediction of 37 economists in a Bloomberg News survey. Prices rose 0.8 percent on the month, the most in almost seven years.
"This puts the cat among the pigeons in the U.K.,'' said Trevor Williams, chief economist at Lloyds TSB Group Plc and a former British government economist. "Interest-rate cuts are totally off the agenda. The underlying problem we face in the real economy is inflation.''
The pound rose and gilts fell after the report showed inflation, stoked by food and energy costs, is now within 0.1 percentage point of the government's upper limit. Policy makers have cut the benchmark interest rate three times since December to 5 percent to avert a recession as house prices fall, with a report today showing the most widespread declines since at least 1978.
The pound rose as much as 0.3 percent against the dollar after the report and traded at $1.9454 as of 10:51 a.m. in London. Yields on two-year government bonds jumped 10 basis points to 4.431 percent.
Inflation Forecasts
Governor Mervyn King will signal whether the central bank has scope for further interest-rate cuts when he presents the bank's quarterly inflation forecasts tomorrow. Policy makers had the details of today's report at their May 8 meeting, when they kept the key rate unchanged.
Inflation has exceeded the central bank's 2 percent target for seven months. The 0.5 percentage-point increase in the rate from March was the biggest jump since July 2002.
The price of oil, which has more than doubled in the past year, rose to a record $126.40 per barrel yesterday. Wheat prices have increased 75 percent in the same period.
Centrica Plc, Britain's biggest energy supplier, said yesterday it may raise household natural gas and power prices for a second time this year on stubbornly high fuel costs. Producer prices rose 7.5 percent in April from a year earlier, the fastest pace since 1986, statistics office said yesterday.
King's View
King said on April 29 that inflation is likely to reach the government's 3 percent limit and may exceed it. British law requires him to write a letter of explanation to the government if inflation strays more than 1 percentage point from the central bank's 2 percent target.
Faster inflation may encourage workers to seek bigger pay increases, risking a spiral of wages and prices. Retail-price inflation, a measure of the cost of living used in salary negotiations rose to 4.2 percent, the most since November.
Excluding mortgage-interest payments, the rate was 4 percent, the most since September 1992. The government used this measure as its official inflation gauge until 2003.
"Higher fuel and utility bills are eating away at people's spare cash,'' Stephen Robertson, director general of the British Retail Consortium, said in a statement today. "With the economic fundamentals remaining weak, there seems no reason for these tough trading conditions to improve soon.''
Revenue at shops open at least a year fell from a year earlier for a second month in April, dropping 1.5 percent, the BRC, which represents 80 percent of U.K. stores said today.
Rate Forecasts
Economists predicted before today's report that the bank would reduce rates further to nurture economic growth. The median forecast of 22 economists in a Bloomberg survey was for the central bank to cut its rate to 4.25 percent by the end of 2008.
"Without a modest cut in interest rates, the risk of a severe economic downturn would intensify,'' said David Kern, chief economic adviser to the British Chambers of Commerce, a business lobby group. "The immediate threats to growth remain more serious than the risks of higher inflation.''
Paul Donovan, an economist at UBS AG in London, said that the central bank will still cut interest rates because slowing growth will damp inflation.
"Inflation was always going to go above 3 percent,'' he said in an interview on Bloomberg Television. "It will go higher. But the Bank of England isn't worried about inflation now, it's worried about inflation in the future.''
Turmoil in credit markets prompted the International Monetary Fund to forecast U.K. growth of 1.6 percent in 2008, the least since the end of the last recession 16 years ago.
The U.K. housing market had the most widespread declines in April since at least 1978, the Royal Institution of Charted Surveyors said today. Banks raised the cost of borrowing for homebuyers with a 5 percent deposit to the highest in more than eight years in April, declining to pass on the central bank's rate cuts.
"Despite the credit crunch, we really are going to have to start thinking about upward risks to interest rates,'' after today's report, said Lloyds TSB's Williams. He predicts the central bank will avoid further rate reductions this year.
Consumer prices climbed 3 percent from a year earlier, compared with 2.5 percent in March, the Office for National Statistics said today in London. The result was the highest in 13 months and exceeded the 2.6 percent median prediction of 37 economists in a Bloomberg News survey. Prices rose 0.8 percent on the month, the most in almost seven years.
"This puts the cat among the pigeons in the U.K.,'' said Trevor Williams, chief economist at Lloyds TSB Group Plc and a former British government economist. "Interest-rate cuts are totally off the agenda. The underlying problem we face in the real economy is inflation.''
The pound rose and gilts fell after the report showed inflation, stoked by food and energy costs, is now within 0.1 percentage point of the government's upper limit. Policy makers have cut the benchmark interest rate three times since December to 5 percent to avert a recession as house prices fall, with a report today showing the most widespread declines since at least 1978.
The pound rose as much as 0.3 percent against the dollar after the report and traded at $1.9454 as of 10:51 a.m. in London. Yields on two-year government bonds jumped 10 basis points to 4.431 percent.
Inflation Forecasts
Governor Mervyn King will signal whether the central bank has scope for further interest-rate cuts when he presents the bank's quarterly inflation forecasts tomorrow. Policy makers had the details of today's report at their May 8 meeting, when they kept the key rate unchanged.
Inflation has exceeded the central bank's 2 percent target for seven months. The 0.5 percentage-point increase in the rate from March was the biggest jump since July 2002.
The price of oil, which has more than doubled in the past year, rose to a record $126.40 per barrel yesterday. Wheat prices have increased 75 percent in the same period.
Centrica Plc, Britain's biggest energy supplier, said yesterday it may raise household natural gas and power prices for a second time this year on stubbornly high fuel costs. Producer prices rose 7.5 percent in April from a year earlier, the fastest pace since 1986, statistics office said yesterday.
King's View
King said on April 29 that inflation is likely to reach the government's 3 percent limit and may exceed it. British law requires him to write a letter of explanation to the government if inflation strays more than 1 percentage point from the central bank's 2 percent target.
Faster inflation may encourage workers to seek bigger pay increases, risking a spiral of wages and prices. Retail-price inflation, a measure of the cost of living used in salary negotiations rose to 4.2 percent, the most since November.
Excluding mortgage-interest payments, the rate was 4 percent, the most since September 1992. The government used this measure as its official inflation gauge until 2003.
"Higher fuel and utility bills are eating away at people's spare cash,'' Stephen Robertson, director general of the British Retail Consortium, said in a statement today. "With the economic fundamentals remaining weak, there seems no reason for these tough trading conditions to improve soon.''
Revenue at shops open at least a year fell from a year earlier for a second month in April, dropping 1.5 percent, the BRC, which represents 80 percent of U.K. stores said today.
Rate Forecasts
Economists predicted before today's report that the bank would reduce rates further to nurture economic growth. The median forecast of 22 economists in a Bloomberg survey was for the central bank to cut its rate to 4.25 percent by the end of 2008.
"Without a modest cut in interest rates, the risk of a severe economic downturn would intensify,'' said David Kern, chief economic adviser to the British Chambers of Commerce, a business lobby group. "The immediate threats to growth remain more serious than the risks of higher inflation.''
Paul Donovan, an economist at UBS AG in London, said that the central bank will still cut interest rates because slowing growth will damp inflation.
"Inflation was always going to go above 3 percent,'' he said in an interview on Bloomberg Television. "It will go higher. But the Bank of England isn't worried about inflation now, it's worried about inflation in the future.''
Turmoil in credit markets prompted the International Monetary Fund to forecast U.K. growth of 1.6 percent in 2008, the least since the end of the last recession 16 years ago.
The U.K. housing market had the most widespread declines in April since at least 1978, the Royal Institution of Charted Surveyors said today. Banks raised the cost of borrowing for homebuyers with a 5 percent deposit to the highest in more than eight years in April, declining to pass on the central bank's rate cuts.
"Despite the credit crunch, we really are going to have to start thinking about upward risks to interest rates,'' after today's report, said Lloyds TSB's Williams. He predicts the central bank will avoid further rate reductions this year.
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