Tags: EU | Britain | Economy

U.K. Consumer Price Inflation Rises to 3.4 Percent

Tuesday, 20 Apr 2010 06:53 AM

Higher prices for housing pushed consumer price inflation to 3.4 percent in March, up from 3 percent in February, official statisticians said Tuesday.

The inflation rate has soared above the government's official 2 percent target even as the economy slowly recovers from six quarters of a deep recession. However, analysts believed rising inflation would not prompt the Bank of England to raise interest rates.

"We would not expect the Bank of England to be swayed by short-term movements in commodity prices, so today's figures should not have much bearing on interest rates. We still expect rates to remain on hold for the remainder of this year," said Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club.

The retail prices index, which includes the cost of mortgages and housing, rose to 4.4 percent in March, the highest level since September 2008, the Office for National Statistics said.

The retail prices index excluding mortgage interest payments rose from 4.2 percent in February to 4.8 percent in March, the agency said.

The ONS said costs for housing and household services dropped between February and March, but remained 14 percent above the previous year's level.

Transportation costs were up 11.3 percent compared to a year ago.

Inflation has also been driven by the increase in Britain's broad-based Value Added Tax from 15 percent last year to 17.5 percent on Jan.1.

Although rising inflation will cause some concern for Bank of England rate-setters, IHS Global Insight economist Howard Archer said the bank is unlikely to raise the base rate in the near term from the all-time low of 0.5 percent.

"Consumer price inflation is likely to hover around 3.0-3.5 percent in the near term due to unfavorable base effects resulting from the marked retreat in inflation a year ago when the recession was at its deepest. However, consumer price inflation will hopefully be firmly on a downward path by the end of the second quarter," Archer said.

James Hughes, chief economist at Black Swan Capital, took a more pessimistic view.

"The U.K. economy has some very deep, fundamental problems that won't be solved simply by installing a new government, and this sharp increase in UK inflation to 3.4 percent is possibly just the start of an inevitable and unstoppable slide towards double-digit inflation and interest rates within the next few years," Hughes said.

Marl Bolsom at Travelex Global Business Payments said rising inflation showed the downside of the pound sterling's weakness.

"This data adds to the confusing economic outlook — on the one hand, we need a weaker pound to boost our export-led growth, but on the other hand, the U.K. is an import based economy," Bolsom said.

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