UK inflation hits highest rate in 3 years

AP News
Posted: Oct 18, 2011 3:10 PM
UK inflation hits highest rate in 3 years

Britain's inflation rate jumped to a three-year high of 5.2 percent in September, a bigger than expected increase driven by rising costs for electricity and gas, official data showed Tuesday.

Bank of England Governor Mervyn King said he believed inflation was at or near its peak after 22 months of overshooting the official target of 2 percent.

The consumer price inflation rate announced by the Office for National Statistics was a big jump from the 4.5 percent reported a month earlier and beat the market consensus of 4.9 percent.

At a time when average weekly earnings are just 1.8 percent higher than a year ago, household electric costs rose 7.5 percent and gas leaped 13 percent in one month, the agency said. Clothing and footwear prices rose by 4.4 percent.

The main downward pressure came from a decrease in air fares.

Inflation last hit 5.2 percent in September 2008. The Bank of England has forecast that inflation would peak above 5 percent before reversing toward the target.

Gerard Lane, equity strategist at Shore Capital, said inflation for household essentials _ food and nonalcoholic

beverages, housing and utility bills, transport fuels, housing and motor insurance, and telephone service _ is now rising by 8.8 percent a year.

That, in turn, has depressed consumer spending.

Despite stubbornly high inflation, the Bank of England's Monetary Policy Committee has been more concerned about subdued growth in the economy _ just 0.2 percent in the second quarter _ and has resumed a program of massive stimulus which poured 200 billion pounds ($315 billion) into the economy between March 2009 and January 2010.

Last month the MPC decided to spend another 75 billion pounds ($118 billion) on quantitative easing, a program that hopes to stimulate the economy through asset purchases.

King said stimulus would not solve underlying problems of indebtedness and an over-large public sector.

"Providing liquidity to buy time to devise and put in place a coherent response to the underlying problem can be not only valuable but necessary," King said in a speech in Liverpool.

"Without monetary stimulus _ low interest rates and large asset purchases _ there is a risk that growth will stall and inflation fall below our symmetric 2 percent target," King added. "But easy monetary policy, by bringing forward spending from the future to the present, means that the ultimate adjustment of borrowing and spending will be even greater.

Tuesday's inflation data will be unwelcome to the government just as unemployment has reached a 17-year high, because the September rate customarily is used to adjust benefit payments.