UK inflation unchanged at 4.5 pct in May

AP News
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Posted: Jun 14, 2011 5:35 AM
UK inflation unchanged at 4.5 pct in May

Britain's main inflation rate was unchanged in May at an annual rate of 4.5 percent, but the Bank of England is not expected to start raising interest rates for a while yet given a tepid economic recovery.

The Office for National Statistics said Tuesday that rising food, drink and fuel prices kept the consumer price index at more than double the official target of 2 percent. The unchanged reading was in line with market expectations.

Inflation has been above target for 18 months, but the Bank of England's Monetary Policy Committee has kept its base rate at an all-time low of 0.5 percent because of concern about the nation's weak recovery. Over the past two quarters, Britain recorded no economic growth.

Inflation is not expected to come down anytime soon, especially as the increase in the country's main sales tax in January to 20 percent from 17.5 percent will continue to impact on annual comparisons for the rest of the year, as will rising utility bills in the wake of surging energy costs.

Despite the upward pressures on inflation, the markets are increasingly moving to the view that interest rates won't be raised for a while yet, with some analysts now predicting that borrowing costs will remain on hold all year.

Jonathan Loynes, chief European economist at Capital Economics, said higher prices for food and energy are likely to push consumer price inflation up to 5 percent in the near term.

"But thereafter, we still believe that inflation will drop back sharply as food, energy and VAT (sales tax) effects start to fade and weak activity, spare capacity, slow wages growth and weak money growth bring core inflation back down," Loynes said.

There were some signs that price pressures may be easing in Tuesday's release. Core inflation, which strips out energy, food, beverages and tobacco, fell to 3.3 percent in May from 3.7 in April.