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18. July 2007

Inflation dips but stays in the danger zone

Source The Guardian Unlimited (bitte übernehmen) 

UK inflation eased lower last month, thanks to a fall in utility bills. But price pressures in the underlying data mean the Bank of England is still likely to raise interest rates in the coming months, analysts said, with another rate hike possible as early as next month. 

Consumer Price Inflation rose by 0.2% in June, the Office for National Statistics said, taking the annual rate down from 2.5% to 2.4%.

This is a marked fall from the 10-year high of 3.1% hit in March and its weakest rate in eight months, but still well above the Bank's 2% long term target.

The pound, which had already set new 26-year highs yesterday, strengthened to fresh levels after the news. Sterling rose as high as $2.0428, up from the $2.0405 level it reached on Monday.

Economists had expected inflation to drop back slightly last month after the recent cuts in gas and electricity prices, although some had been hoping for a sharper fall.

The ONS figures showed increases in petrol costs on the back of higher oil prices and there was also a surprise jump in furniture prices.

These rose at a record annual rate ahead of the usual summer sales, suggesting demand was still strong in the housing market.

Clothing prices also slowed by less than had been expected.

The core CPI annual rate, which excludes more volatile components like energy, alcohol, food and tobacco prices, rose to 2% - its highest since March 1997, from 1.9% in May.

"It has to be said the figures are somewhat disappointing," said Philip Shaw at Investec. "Although the headline CPI has fallen back, it has fallen back by less than hoped."

The figures look to strengthen prospects of interest rates reaching 6% or beyond. There have already been five rate rises since August last year, taking rates to their current 5.75%.

"The result will at the margins increase the possibility that the Bank delivers a back-to-back rise in August," said Gavin Redknap, economist at Standard Chartered.

"The pick-up in hawkishness by the Bank evident over the past couple of weeks suggests that the MPC is preparing markets for another move. If they do intend to hike again, they may as well not waste time in doing so."

Analysts also expressed concern over rising food and energy costs. Oil prices hit an 11-month high of $78.40 yesterday and there were warnings from investment bank Goldman Sachs that they could breach the $90 mark if the Opec did not increase its production to meet rapidly spiralling demand in the face of limited supply.

Adverse weather conditions have damaged crops and economists said this could increase food prices, which pushed up inflation earlier this year.

Meanwhile retail price inflation also rose unexpectedly, to 4.4%, as housing costs rose on the back of higher mortgages.

Mr Shaw said this was worrying since it could impact wage claims, which until now have been relatively modest.

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