Inflation rate soars and economists fear 6% on the way
12.30pm BST update
- guardian.co.uk,
- Tuesday July 15, 2008
- Article history
Inflation hit a new record of 3.8% last month as food and petrol prices rocketed, raising fears that inflation is surging towards 5% or even higher.
The Office for National Statistics said June's annual inflation rate was the highest since the consumer prices index was set up in January 1997, up from 3.3% in May. The rate is nearly double the Bank of England's inflation target of 2%.
The jump in inflation surprised economists, who had expected it to reach 3.6%, and warned that the cost of living will head sharply higher in the next few months - increasing the pressure on the Bank of England to raise interest rates. Bank governor Mervyn King has already cautioned that record oil prices are likely to push inflation above 4% .
"CPI inflation is heading for 5% plus late this year," said Michael Saunders at Citi. "The monetary policy committee is 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, [the MPC] would be hiking." George Buckley of Deutsche Bank warned that "a breach of 4% seems almost inevitable" and "questions will now be asked if 5% could be reached".
And Alan Clarke of BNP Paribas said that as inflation keeps scaling new peaks, "before too long we are going to be talking about inflation with a 6% handle".
Both food and transport inflation surged to the highest levels since 1997. The cost of food and soft drinks rose 9.5% from a year ago while transport prices were up by 7.3%. Meat prices, in particular beef, rose by more than last year. Fruit, bread and cereals, as well as milk, cheese and eggs, are also dearer. Soaring fuel prices pushed transport costs higher with the average price of petrol increasing by 5.3p a litre between May and June to reach 117.6p. Diesel prices rose by 7.1p a litre.
Even the core inflation measure, which excludes food, energy and tobacco, picked up to 1.6% from 1.5%.
The figures will add to concerns at the Bank of England, which faces a delicate balancing act. In the Bank's annual report published yesterday, King cautioned that the MPC "can have little impact on the path of inflation in the short term". He said the committee had "not attempted to prevent inflation moving away from the target" for fear of causing wider damage to the economy.
Andrew Sentance, who sits on the Bank's rate-setting committee, reiterated in a speech today that the Bank needed to balance the economic slowdown, caused by the credit crunch, against the risk of higher inflation becoming entrenched. He warned that "short-term inflation pressures could become embedded in the next round of pay settlements".
The retail prices index (RPI), the measure usually used in wage negotiations (which unlike the CPI includes housing costs), climbed to an annual rate of 4.6% in June from 4.3% in May.
ING economist James Knightley said: "Today's inflation figure may boost talk of a potential rate hike, but the comments from Bank of England officials over the past 48 hours - when presumably they had the data - hinted that there was little appetite for such a move. Indeed, King and [MPC member Kate] Barker were arguing that they have to be careful that the economy doesn't slow too quickly, driving inflation down below target in two years' time."
The financial markets are betting that the Bank could raise interest rates later this year to combat rising inflation. However, a growing number of economists think the economy is entering recession, which will push inflation lower next year.
Howard Archer of Global Insight warned that "the economic environment facing the Bank of England currently seems to be becoming more difficult by the day as new data and survey evidence indicate that the downturn is deepening and widening but inflationary pressures are continuing to rise".
Greater discounting on the high street in June than a year ago meant prices for clothing and shoes fell by 7.5%. Alcohol prices also pushed overall inflation lower as the cost of spirits fell this year, having risen last year, while wine prices increased by less than a year ago.
"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, chief economist at Investec.
Soaring oil and petrol prices pushed inflation at the factory gate up to 10% last month, the highest since records began in 1986, while manufacturers' costs surged by a record 30%, ONS figures showed yesterday. Today's rise in CPI suggests that higher prices charged by manufacturers are starting to feed through to the high street.
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