Inflation rises to eight-year high

Britain's inflation rate has risen to its highest level in eight years, official figures showed today, diminishing prospects for another interest rate cut any time soon.

Boosted by the surge in petrol prices, the consumer prices index (CPI) rose unexpectedly by 2.3% in the year to July, up from 2% in June, the Office for National Statistics reported.

The July figure was the highest since the current series of data began in January 1997 and it was the first time that the inflation rate had risen above the Bank of England's 2% target since its adoption in December 2003.

The Bank of England last week said inflation will probably rise a little further in the next few months, but the rise in prices substantially exceeded City expectations. Analysts had expected no change from June.

Given the surprise jump it is now unlikely that the Bank will make another cut in borrowing costs in the next few months. The Bank's monetary policy committee (MPC) cut interest rates this month by a quarter-point to 4.5% amid a welter of data indicating a slowdown in the economy.

"This will not please the Bank of England at all, and significantly diminishes the prospects of another interest rate cut before the end of this year," said Howard Archer, chief UK economist with the consultancy Global Insight.

The ONS said petrol prices added 0.13 percentage points to the annual CPI rate as crude oil costs have risen. Oil prices have almost doubled since the spring of 2004 and have had a direct and rapid impact on petrol prices, currently above 90p a litre. Oil prices also have a slower and less direct impact of the costs of producing other goods and services.

The ONS said upward pressure also came from air and sea travel as well as from furniture where prices were little changed this year, due to the fact that price recoveries in some major retail chains offset summer sales in others. What will be of concern to the Bank is the rise in the core rate of inflation, which excludes energy, food, alcohol and tobacco.

"The core rates of inflation have risen sharply between June and July. Indeed, core inflation has risen by 0.3% to almost 2% on this measure, which might prove to be something of a concern for the MPC," said George Buckley of Deutsche Bank.

In its inflation report last week, the Bank of England predicted that inflation would initially rise above 2% and then dip back beneath its target.

"The initial increase and decline partly reflects the impact of oil prices on CPI inflation," the inflation report said. "Easing demand pressures over the recent past an in the near term also slow the rate of CPI inflation."

But two years out, the Bank predicted that inflation will again rise above the 2% target as the economy picks up. The report's tone indicated that the Bank would not cut rates by much more. Today's inflation numbers will probably reinforce such sentiments.