UK inflation remains at highest level since May

UK inflation held at 2.7 per cent last month, confounding forecasts it would ease.

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UK inflation stayed at its highest level since May last month, confounding forecasts it would ease and potentially giving the Bank of England less room to resume quantitative easing to support the struggling economy.

The data released yesterday, showing annual consumer price inflation (CPI) held at 2.7 per cent after a surprise jump in October, will reinforce Bank of England concerns that price pressures may prove persistent and restrain consumer spending.

"The next few months we'll see inflation staying around where it is now," said David Tinsley, an economist at BNP Paribas and a former central bank official.

"Mainly it's down to utility bill hikes that are coming in."

Analysts were not expecting the data to be quite so gloomy.

"I was a little surprised on CPI because I was expecting utility prices to have less of an impact. There are still quite a lot of utility price increases in the pipeline," said Jens Larsen, an economist at RBC Capital Markets.

Economists had forecast a dip in inflation to 2.6 per cent last month.

High inflation, which peaked at 5.2 per cent last year, has weighed on consumer spending, holding back the economy's recovery from its second recession in four years.

A fall in petrol prices was not enough to outweigh price rises for household bills for electricity and gas, as well as food, the data from the office for national statistics showed.

In addition, annual services price inflation accelerated to 4.2 per cent, its highest since last December.

In its quarterly forecasts released last month, the Bank of England (BoE) said British inflation was likely to be significantly higher over the next 18 months than expected in August.

The central bank's projections showed that it would take until the third quarter of 2014 before inflation fell below its 2 per cent target, nine months later than predicted in August, despite sluggish economic growth.

Stubbornly high inflation deterred some policymakers from approving another cash boost for the economy last month, and this month the BoE again voted against more government bond purchases.

Minutes of its last policy meeting due to be released tomorrow will provide an insight into what drove that decision.

Worries about price rises are likely to have been among the reasons, as Paul Fisher, the BoE rate-setter, said last week he would wait for signs that inflation was coming down before voting to extend asset purchases beyond the current total of £375 billion (Dh2.23 trillion).

Philip Shaw, an Investec economist, said inflation was likely to rise above 3 per cent over the next few months, which he said could stop the central bank's monetary policy committee (MPC) from injecting more stimulus into the fragile economy.

"We feel a likely rise in inflation is going to result in the MPC keeping policy on hold, but much depends on how weak the economy is and, if we were to see a very weak patch in activity, then the MPC could look through a period of increased inflation rates," he said.

There was some good news on underlying inflation pressures from separate ONS data on producer prices.

It showed that annual factory-gate inflation eased unexpectedly in November to 2.2 per cent - its lowest since July - from an upwardly revised 2.6 per cent in October.The annual rate of fuel cost inflation eased to its slowest since February 2011, though the cost of imported food rose sharply. Spencer Dale, the BoE chief economist, raised concerns last week that inflation may show "stickiness", complicating the task of policymakers seeking to stimulate the economy with price growth above their 2 per cent goal. The central bank raised its near-term inflation forecast last month and today's data may further fuel debate on whether the central bank's mandate should be changed.

"The debate about the inflation target will keep on the boil," Mr Tinsley said.

"The big picture is there's quite a lot of sense in having a higher underlying rate of inflation in the UK, as we need some way of getting more stimulus in the economy and the current inflation target doesn't allow a lot more stimulus because inflation is high."

* compiled from Reuters and Bloomberg News