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UK Inflation Jumps to Series High 3.8% in June

Reuters
Tuesday, 15 Jul 2008 | 6:55 AM ET

Soaring food and fuel prices pushed Britain's inflation rate to nearly double the central bank's 2 percent target in June, official data showed on Tuesday, boosting talk of interest rate hikes ahead.

UK Inflation Hits 3.8% in June
UK inflation rose to 3.8% in June, nearly double the central bank's stated target, official data showed on Tuesday. Michael Taylor from Lombard Street Research has analysis.

Consumer price inflation rose more than expected to 3.8 percent from 3.3 percent in May, while another two surveys indicated the economy was on the verge of a marked economic slowdown, highlighting the dilemma facing policymakers.

The BoE will have seen the spike in inflation at its rate-setting meeting and policymaker Andrew Sentance said less than an hour before the figures came out that the central bank had to balance the economic slowdown underway versus the risk that higher inflation becomes embedded.

"CPI inflation is heading for 5 percent-plus late this year. The MPC are unlikely to cut near-term with such high inflation even though the UK may be slipping into recession. If the economy was not so weak, they would be hiking," said Michael Saunders, economist at Citigroup.

Separate surveys from the Royal Institution of Chartered Surveyors and British Retail Consortium showed British house price falls eased slightly in June but market conditions remain bleak, while retail sales fell on a year ago, according to surveys on Tuesday.

Interest rate futures initially fell sharply on the UK inflation data before recouping some ground.

It was the third month in a row that inflation figures have come in above forecasts and the second time in that period that the annual rate has jumped by half a percentage point.

Inflation now stands at its highest annual rate since the Bank of England was given the power to set interest rates in 1997.

The biggest contribution came from food and non-alcoholic beverages which rose 2.1 percent on the month and added 0.18 percentage points to the annual inflation rate.

Core inflation, which strips out volatile items such as food and fuel, rose to 1.6 percent, the highest since last August.

That may concern policymakers worried about potential second-round effects from soaring energy costs.

Clothing and footwear prices, however, posted their biggest annual fall since August 2002.

"It is interesting that there is evidence of significant deflation in clothing and footwear which is probably a sign of weak consumer demand which we would hope will help to keep inflation on track to meet the target in the medium-term," said Philip Shaw, an economist at Investec.

RPI inflation, which forms the basis for most wage deals, jumped to 4.6 percent, the highest since March 2007.

Policymakers have repeatedly warned of the dangers of a wage-price spiral.