Inflation surges to 16-year high

Inflation soared to 4.4% last month – the biggest jump in the cost of living in more than 16 years – on the back of rocketing food prices, clouding hopes that the Bank of England will move to cut interest rates in coming months.

The Office for National Statistics said today that the consumer prices index (CPI), the government’s preferred inflation measure, leapt to an annual rate of 4.4%, up from 3.8% in June. This beat analysts’ expectations of inflation of 4.1%, and is more than double the government’s target.

This is the highest level recorded since the CPI series began in January 1997. According to analysts, inflation was last higher in April 1992 when it hit 4.7%.

The main driver was hefty rises in food prices, particularly bacon, ham and poultry. The cost of meat on the year was up a record 13.7%. Bread and cereal prices also shot up and fuel inflation was at an all-time high as well.

Conservative leader David Cameron said inflation was “yet another worrying signal” for families, who are already battling against sharp increases in their cost of living from higher utility bills, petrol prices and spiralling grocery bills.

“Hundreds of thousands of families now have the threat of negative equity hanging over them, businesses are cutting back, unemployment is creeping up and this morning’s inflation figures are yet another worrying signal for families desperately trying to make ends meet,” said Cameron at his monthly press conference today.

And with the UK econony slowing, inflation is also a concern for policymakers on the monetary policy committee as they try to control inflation and keep it to their target rate of 2%. Today’s figure was seen by the MPC last week when they decided to keep interest rates on hold at 5% for the fourth consecutive month despite fears that the economy is on the brink of recession.

Analysts said the figures were particularly worrying since they did not reflect the recent hikes in utility bills by many energy companies. However, there may be a softening effect in the future from petrol prices following the recent slide in crude oil.

Worryingly for policymakers concerned about second-round effects, the retail price index of inflation, on which many wage deals are based, shot up to 5%. This was the highest for 17 years.

Core inflation, which strips out volatile items like food, energy and tobacco also edged up to 1.9% suggesting that weaker demand is not preventing firms from passing on their high costs to consumers.

“It looks possible that inflation will hit 5% within two or three months as the latest round of utility price hikes affects the index,” said Vicky Redwood at Capital Economics. “A rate cut within the next couple of months looks well off the agenda.”

Having analysed the health of the UK economy over the last few months, the Bank will reveal its latest forecasts for the inflation outlook tomorrow when its quarterly inflation report is published. Analysts are hoping that the report will signal the path of borrowing costs needed to bring inflation back to target in the coming months.

Economists also expect that the Bank will slash its economic growth forecast for this year and next in the report to the lowest level since it was granted independence in 1997.

The MPC has been faced with an increasingly tough dilemma when setting interest rates, having to juggle rising price pressures with the prospect of a sharp economic downturn.

The inflation numbers cast further gloom over the UK economy, which is already battling under the burden of the housing market slump, falling sales on the high street and rising unemployment.
Angela Balakrishnan
Tuesday August 12 2008 10:04 BST

Source: The Guardian

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