British 12-month inflation climbed unexpectedly to 3.2 per cent in February from 3.0 per cent in January owing to higher food and drink prices, official data showed on Tuesday.
On a monthly basis, Consumer Price Index (CPI) inflation rose by 0.9 per cent in February from January, the Office for National Statistics (ONS) said in a statement.
Annual CPI inflation has now held above the Bank of England’s (BoE) 2.0-per cent target level since October 2007.
“The largest upward pressure on the CPI annual rate came from food and non-alcoholic beverages,” the ONS said. “The effect was widespread but the largest individual factor was the price of vegetables.”
In a letter to British finance minister Alistair Darling, BoE governor Mervyn King explained why annual CPI inflation remained more than 1.0 per cent above target.
King blamed the impact of the weak British pound, which means that it costs more for British-based companies to buy produce and materials from abroad.
“February’s (CPI) inflation outturn is somewhat higher than expected,” King wrote in the letter.
“That could reflect pass-through of the exchange rate depreciation to consumer prices since much of the strength… appears to be concentrated in components where a large share of goods is imported.”
February’s CPI readings contrasted with market expectations for an annual gain of 2.6 per cent and a monthly increase of 0.2 per cent.
King added that the effect of sharp falls in commodity prices – such as crude oil which has slumped from record levels – were being dampened by the weak level of sterling against rival currencies.
“Since last summer, world commodity prices have fallen sharply and that has helped drive a fall in overall CPI inflation from 5.2 per cent in September to 3.2 per cent in February,” King said.
“But the effect on UK consumer prices of decreases in world (commodity) prices has been dampened by the depreciation of sterling.”
The ONS added Tuesday that the Retail Prices Index (RPI) annual inflation rate, which includes the cost of home loans, was flat in February after a rise of 0.1 per cent in January.
Analysts had expected the annual RPI figure to turn negative for the first time since 1960 – which would have signalled deflation or a prolonged period of falling prices in recession-hit Britain.
Nevertheless, February’s zero-per cent RPI reading was the weakest figure since March 1960.
“The big picture remains that deflation is on its way,” warned economist Vicky Redwood at the Capital Economics consultancy.
“After all, at zero (per cent) in February, the RPI measure was as close to deflation as you can get.”
And IHS Global Insight economist Howard Archer agreed that prices would slide in the months ahead.
“Despite the rise in February, we still expect annual consumer price inflation to fall back substantially over the coming months,” he said.
“This is expected to be the consequence of heightening pressure on retailers to price competitively as consumer spending increasingly wanes, companies’ diminishing pricing power through the supply chain (and) sharply lower oil and commodity prices compared to 2008’s peak levels.”
King also warned against a major fiscal stimulus at the annual budget, set to be unveiled next month, arguing that given the current government deficits, “it would be sensible to be cautious about going further in using discretionary measures to expand the size of those deficits.”