U.K. February Inflation Quickens More Than Forecast to 4.4%

U.K. inflation accelerated more than economists forecast in February to the fastest pace in more than two years, adding pressure on the Bank of England to increase its benchmark interest rate.
Consumer prices rose 4.4 percent from a year earlier after a 4 percent increase in January, the Office for National Statistics said today in London. That’s the most since October 2008. The median forecast of 32 economists in a Bloomberg News survey was 4.2 percent. A separate report showed the budget deficit unexpectedly widened as government revenue fell.
Strengthening price pressures pushed three of the bank’s nine policy makers to argue this month for higher interest rates to tame inflation, which is now more than double their 2 percent target. The U.K.’s recovery may still be hampered by the government’s budget squeeze, while officials must also weigh the potential impact on the global economy of the earthquake and tsunami in Japan.
“Inflation is only headed one way in the coming months and we see it getting very close to 5 percent,” said Hetal Mehta, an economist at Daiwa Capital Markets Europe. “There is so much uncertainty, not least because of the quake in Japan, the bank will want to wait. It’s a close call, but May would be a bit early for a rate increase.”

Pound Climbs

The pound jumped as much as 0.4 percent against the dollar after the data were published. It traded at $1.6387 as of 11:48 a.m. in London, up 0.5 percent on the day. Bonds fell, with the yield on the 10-year gilt rising 9 basis points to 3.61 percent.
“It goes without saying” that Prime Minister David Cameron has confidence in central bank Governor Mervyn King, Steve Field, Cameron’s spokesman, told reporters in London today. “One of the reasons we are seeing high inflation at the moment is because of what’s happening to global commodity prices.”
The gain in inflation was led by clothing prices and the costs of housing services such as heating, the statistics office said. Clothes prices jumped an annual 2.8 percent in February, the most since the data began in 1997. Costs for housing, water, electricity, gas and other fuels were up 3.1 percent on the year, the most since August 2009.
From the previous month, consumer prices rose 0.7 percent.
So-called core inflation, which excludes costs of energy, alcohol, food and tobacco, rose an annual 3.4 percent after a 3 percent increase in January.

Retail Prices

Retail-price inflation, a measure of the cost of living used in wage negotiations, accelerated to 5.5 percent in February from 5.1 percent the previous month. That’s the fastest since July 1991. On the month, prices by that measure increased 1 percent. Excluding mortgage costs, retail-price inflation was also 5.5 percent.
Crude oil prices have risen about 40 percent in the last six months and remained above $100 a barrel today. U.K. inflation was also boosted after Chancellor of the Exchequer George Osborne raised the sales-tax rate to 20 percent in January to tackle the record budget deficit. He told the BBC on March 20 he may delay a planned increase in fuel duty to help motorists cope with rising oil prices.
Britain’s budget deficit unexpectedly widened in February as government revenue fell, a separate report today showed, underlining the pressure on Osborne to stick to his fiscal tightening plan. He will announce his budget for the fiscal year through March 2012 tomorrow.

Government Borrowing

Net borrowing was 11.8 billion pounds ($19.3 billion), compared with 9.5 billion pounds a year earlier. The median forecast of 13 economists in a Bloomberg survey was for a reading of 7.2 billion pounds. Government income fell 0.9 percent and spending rose 4.6 percent.
The Bank of England’s Monetary Policy Committee held its benchmark interest rate at a record low of 0.5 percent this month and its bond-purchase plan at 200 billion pounds. Minutes of the decision to be published tomorrow will show if other officials joined a push for an increase by three officials including Chief Economist Spencer Dale.
Investors have pared bets on the timing of the next increase after the earthquake, tsunami and radiation leaks in Japan, the world’s third-largest economy. Forward contracts on the sterling overnight interbank average showed yesterday the first 25 basis-point increase will be in August. That compares with bets on March 9 for a June increase, according to the data, compiled by Tullett Prebon Plc.
Accelerating inflation may also damp the U.K. recovery by eroding consumers’ spending power. Markit Economics said yesterday a gauge of Britons’ finances fell 35.2 this month, the lowest since March, compared with 35.6 in February.
Associated British Foods Plc (ABF) said Feb. 28 it’s seen a “noticeable slowing down” of U.K. demand at its Primark clothing stores this year.
“People are thinking they want to be more careful now,” Finance Director John Bason said.