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UK inflation up to 4.7% in August Consumer inflation rises to 4.7%
(about 2 hours later)
The UK's annual rate of inflation has risen to 4.7% in August, up from 4.4% in July. The annual rate of UK inflation rose to 4.7% in August from 4.4% the month before, a higher-than-expected jump.
Bank of England Governor Mervyn King has had to write a letter to the chancellor explaining why inflation is higher than the government's 2% target. In a letter to the chancellor, Bank of England governor Mervyn King warned that inflation could reach a rate of 5% before falling back.
Higher energy and food bills sent the Consumer Price Index (CPI) higher, the Office for National Statistics said. Mr King blamed food and energy price rises for inflation rising beyond the government's 2% target.
Inflation as measured by the Retail Prices Index (RPI) - often used in pay negotiations - fell to 4.8% from 5%.Inflation as measured by the Retail Prices Index (RPI) - often used in pay negotiations - fell to 4.8% from 5%.
The Bank of England's Monetary Policy Committee has not been able to consider a cut in interest rates to boost the flagging UK economy while inflation keeps rising. Food and fuel costs rise
DEAR CHANCELLOR... The expected peak in inflation later this year is now likely to be significantly higher than anticipated Bank of England governor Mervyn King class="" href="http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/2008_09_16_boe_letter.pdf">Mervyn King's letter to the chancellor class="" href="http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/2008_09_16_chancellor.pdf">Chancellor Alistair Darling's reply Most computers will open this document automatically, but you may need Adobe Reader href="http://www.adobe.com/products/acrobat/readstep2.html">Download the reader here But with the sharp fall in oil prices over the past month from their high of close to $150 a barrel, some analysts are optimistic that inflation could be near its peak. The largest contributor to August's rise in inflation was higher gas and electricity bills, with a number of energy firms raising their prices last month, the Office for National Statistics (ONS) said.
"This latest inflation figure, coupled with the recent moves in energy prices, could be an indication of inflation nearing its peak," said Richard Hunter, an analyst at stockbrokers Hargreaves Lansdown. This outweighed the fall in the price of heating oil and petrol, which fell by 5.5 pence per litre between July and August to stand at 113.3p. This followed sharp falls in the price of oil since July.
He added: "This in turn could lead to a loosening of monetary policy by way of an interest rate cut in the UK, at a time when the markets are eagerly seeking signs of recovery." DEAR CHANCELLOR... The expected peak in inflation later this year is now likely to be significantly higher than anticipated Bank of England governor Mervyn King class="" href="http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/2008_09_16_boe_letter.pdf">Mervyn King's letter to the chancellor class="" href="http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/2008_09_16_chancellor.pdf">Chancellor Alistair Darling's reply Most computers will open this document automatically, but you may need Adobe Reader href="http://www.adobe.com/products/acrobat/readstep2.html">Download the reader here
'Unanticipated' The rising price of food and non-alcoholic drinks was also a factor behind the pick-up in inflation, mainly as a result of the increasing cost of meat, fruit and pizzas.
In an open letter to Chancellor Alistair Darling, the Bank of England Governor blamed "sharp, largely unanticipated" increases in food and energy prices for pushing inflation well above the government's target. The fall in the RPI inflation measure was attributed to bank mortgage interest payments remaining static, compared with last year when banks passed on a Bank of England rate rise to home owners.
He said that these pressures were pushing up consumer prices around the world, with eurozone inflation at 4% and US CPI at 5.6%. Global phenomenon
Despite having a share of less than a fifth of the overall basket of goods and services used to calculate UK CPI, energy and food accounted for 2.1% of the 2.6% increase in the inflation rate since last December, he said. If inflation hits a rate more than one percentage point above or below the government's 2% target, the Bank of England governor must write a letter to the government to explain what action it is taking to control consumer prices.
The ONS said the largest contributor to August's rise in inflation was increasing gas and electricity tariffs, with a number of utility firms raising their prices last month. The governor must write to the chancellor again every three months if inflation stays out of the target band.
This outweighed the fall in the price of heating oil and petrol, which fell by 5.5 pence per litre between July and August to stand at 113.3p. Mr King last wrote to the chancellor in June. In his latest letter, Mr King blamed "sharp, largely unanticipated" increases in food and energy prices for pushing inflation well above the government's target.
He said that these pressures were pushing up consumer prices around the world, with eurozone inflation at 4% and US CPI inflation at 5.6%.
Adding to this was a steep pick up in import prices, with the value of the pound falling by 15% against other currencies since sterling's peak in July last year.
Slowdown needed
Mr King hinted that he may have to write more letters to Alistair Darling as he predicted that CPI inflation was likely to remain stubbornly above the government's target until "well into 2009".
In order to prevent inflation expectations from becoming entrenched, he said that the Bank of England has "become firmer in its belief that a period of muted economic growth is necessary to dampen pressures on prices and wages".
The chancellor agreed with Mr King's assessment of inflationary risks and outlook, which analysts said suggested that an interest rate cut may still be some way off.