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Petrol prices push UK inflation higher

Pound coin
Matt Cardy | Getty Images
Pound coin

Inflation in the U.K. rose to 2.9 percent in June, slightly less than analysts had forecast, saving the new Bank of England (BoE) Governor Mark Carney the embarrassment of having to write a letter of explanation to the U.K. government.

Higher motor fuel prices contributed strongly to the increase in inflation, according to the official data, along with clothing and footwear. The gains were weaker for air transport.

Fuel comes under the category of transport which is the largest weighted component of CPI, contributing 14.8 percent of the overall measurement. Transport prices rose by 0.1 percent overall between May and June 2013 compared with a fall of 0.5 percent between the same two months a year ago, the Office for National Statistics (ONS) said.

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The average cost of unleaded petrol rose 1.2 pence a liter in June to £1.34, compared with a fall of 4.3 pence per liter to £1.33 last year.

Diesel prices rose by 0.9 pence this year compared with a 4.7 pence fall a year ago.

Sterling fell and gilts rose following the data, which gave hope to investors that monetary policy in the U.K. will remain loose.

"June is unlikely to mark the peak in inflation. We expect inflation to climb a little higher over the summer to peak around 3.1 percent and then to start coming down gradually from the fourth quarter," Howard Archer, an economist at IHS Global Insight said in a research note. This move higher for inflation will not mean that the BoE is any less likely to add to its current £375 billion quantitative easing (QE) program, according to Archer, and expects the Bank to formally adopt a policy of forward guidance on interest rates in August.

Kathleen Brooks, a research director at FOREX.com, felt that inflation would move higher still as the price of oil - which has risen in recent months - pushes petrol prices upwards, but agrees with Archer that higher inflation doesn't mean that Carney will curb out thoughts on adding to the Bank's bond buying program.

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"Oil prices remain elevated, Brent crude oil is close to $110 per barrel, added to that the heat wave in the U.K. could also boost prices in the food and drink sector after consumers have been rushing to buy barbeques, summer foods and clothes in recent days, " she said in a research note.

If inflation had hit a level of 3.1 percent or more - which some economists had predicted in a Reuters poll - Carney would have had to write an open letter the U.K. Finance Minister George Osborne giving an explanation for the increase in living costs.

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In his first ever first ever monetary policy committee (MPC) meeting on July 4,the BoE kept the main interest rate unchanged at a record low 0.5 percent. But, the announcement coincided with the release of a statement from the bank offering forward guidance on monetary policy, a change from previous meetings, which led to sharp drop in sterling and a rally in London stocks. On Tuesday, a similar move happened, with stocks posted gains and gilt yields and sterling moving lower.

The ONS also released house price data which showed U.K. house prices increased by 2.9 percent in May on a yearly basis, up from a 2.6 percent increase in the 12 months to April 2013.

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81.

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