Inflation: Fears as rate takes record leap

AN IMMINENT cut in interest rates looked increasingly unlikely tonight after a record leap in inflation to more than double the Government's target.

The Consumer Prices Index (CPI) jumped 0.6% to 4.4% in July, its biggest monthly rise since the series began more than a decade ago, according to the Office for National Statistics.

Treasury Chief Secretary Yvette Cooper said the Government was taking steps to mitigate the effects of rising world commodity prices.

"We are already cutting taxes this year by around £4 billion," she told BBC Radio 4's The World at One.

"That is in part to help support the economy at a difficult time – whether it is increasing tax credits or tax allowances, or freezing fuel duty at a rate below inflation.

"But I think everybody recognises that it is not possible for governments to fully insulate, whether it is households or businesses, from these kinds of world oil prices that we have seen."

It was a much bigger jump than the City had been expecting, and took what is the official measure for inflation to more than twice the 2% Government target.

One economist branded the data "desperately disappointing", arguing that it would deter the Bank of England from cutting interest rates in the coming months as policymakers try to bring the runaway cost of living rise back down.

CPI inflation is running at the highest level since the series began in January 1997, and based on older historical data, was last as fierce in April 1992. It has now been above the Government's 2% target mark since October last year.

Inflation as measured by the Retail Prices Index (RPI) – which includes mortgage payments and is often used for pay negotiations – rose to 5% from 4.6%.

The latest CPI rise was driven by rampant food inflation, which hit 13.7% last month and contributed nearly half the 0.6% jump.

Meat products such as bacon and sausages and mince soared 16% in the past, while milk, cheese and eggs were nearly a fifth as dear. Higher petrol and utility bills, as well as airfares, were also significant factors.

Economists highlighted a sharp rise in core CPI inflation, which strips out energy and food impact and which rose 0.3% to 1.9% in July.

That provided evidence of wider inflationary pressure on top of energy prices, and was likely to put off rate cuts for hard-pressed homeowners as the Bank tries to dampen down price growth, they argued.

Vicky Redwood, UK economist at Capital Economics, said the CPI figures were worse than expected, with the sharp rise in core inflation "the most worrying aspect".

She said: "While we still think that the MPC could cut interest rates before the end of the year, a cut within the next couple of months looks well off the agenda."

Investec Securities economist David Page branded the figures "desperately disappointing" and said they provided evidence of broader-based inflationary pressure, with "surprise" contributions from food and air fares.

Mr Page said: "A perilously weak economy has prevented the (Bank of England's Monetary Policy) Committee tightening policy, but inflation is likely to prevent rate cuts before early next year."

The spike in inflation comes as economic growth has slowed to its lowest rate for more than three years.

Gross domestic product growth during the second quarter fell to 0.2% between April and June, the lowest level since the beginning of 2005.

Despite oil prices retreating from record highs near 150 US dollars a barrel over the past month, hefty rises for gas and electricity bills from firms EDF and British Gas in July are expected to drive inflation towards and perhaps beyond the 5% mark in the coming months.

Tomorrow, the Bank of England will outline how it sees inflation progressing in the short and medium term when it unveils the August Inflation Report. More gloomy economic data is also expected in the form of a rise in unemployment figures.

Among the upward price pressures seen last month, electricity and gas was running at 12% higher than a year ago, with fuels and lubricants more than 25% dearer.

Energy bills fell this time last year, exacerbating the current inflationary impact.

TUC general secretary Brendan Barber said of the data: "These figures show that things are only getting tighter for families across the UK.
"It's clear that inflation is not being driven by pay, but by shifts in energy and food prices across the world.

"It is vital that pay rises keep pace with inflation to ensure that our standard of living is not slashed over coming months. Better pay would also improve consumer confidence and lessen the chances of a long and deep economic slowdown next year."

But there are some hopes that inflation may be close to peaking, as today's figures do not take into account a recent sharp fall in oil prices.

Producer prices yesterday showed input price inflation for materials and fuels – the costs faced by manufacturers – fell between June and July to 30.1%, the first dip in 12 months.

A global economic slowdown could also put downward pressure on prices as consumer demand declines.