British inflation surges to 16-year high as oil, food prices bite

LONDON - British 12-month inflation leapt above-target to a 16-year high point of 3.3 percent in May on the back of surging food and energy prices, official data showed on Tuesday.

By (AFP)

Published: Tue 17 Jun 2008, 6:47 PM

Last updated: Sun 5 Apr 2015, 1:10 PM

Analysts said the news had extinguished hopes of an interest rate cut by the Bank of England (BoE) for the foreseeable future, despite Britain also suffering from slowing economic growth and a flagging housing market.

The 12-month inflation reading was the highest level since July 1992 and compared with a rate of 3.0 percent in April, the Office of National Statistics (ONS) said.

Britain's latest inflation data "is yet more disappointing and worrying news," said Howard Archer, an economist at the Global Insight consultancy in London.

He added: "The one thing that can be said with a fair degree of confidence at the moment is that interest rates will not be coming down further any time soon and that if the Bank of England does act in the near term, it will be to raise interest rates."

The 12-month inflation figure breached the Bank of England's upper target and prompted the central bank's governor, Mervyn King, to write to British finance minister Alistair Darling to explain why.

"Inflation has moved sharply higher this year," King wrote in an open letter to Darling, whose official title is chancellor of the exchequer.

"That rise can be accounted for by large, and until recently, unanticipated increases in the prices of food, fuel, gas and electricity."

Leading economies around the world are battling soaring inflation that has largely been fuelled by the soaring cost of crude oil and food.

On world commodity markets on Monday, the price of New York's light sweet crude oil struck a lifetime peak of 139.89 dollars a barrel.

King added Tuesday that oil prices had surged by more than 80 percent in the year to May, to average 123 dollars per barrel.

Over the same period, world agricultural prices had rocketed 60 percent and British retail prices jumped eight percent.

As a result, King said that he expected 12-month inflation to run above target until "well into 2009," in line with the bank's previous forecasts.

The BoE's rate-setting monetary policy committee (MPC) is tasked with keeping annual British inflation within a 1.0-percent band either side of a 2.0 percent target.

"The MPC is aiming to return inflation to the 2.0-percent target within ... its forecast horizon of around two years, when the present rises in energy and food prices will have dropped out of the inflation rate."

On a monthly basis, Britain's consumer prices index surged by 0.6 percent in May from April, the ONS added on Tuesday.

The 12-month figure held above 2.0 percent for the seventh month in a row and compared with analysts' forecasts of 3.2 percent.

On Monday, the EU's Eurostat statistics agency said that 12-month inflation in the eurozone hit a historic 3.7 percent in May on high food and oil prices.

Earlier this month, the Bank of England held its key interest rate at 5.0 percent, which analysts said was designed to dampen high inflation despite slowing growth.

Its last rate move had been in April when it cut borrowing costs from 5.25 percent, by a quarter of a percentage point to their current level.

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