UK inflation stubbornly high after surprise rise in air fares, clothes, food

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From The Telegraph, London
Tuesday, September 14, 2010

http://www.telegraph.co.uk/finance/economics/8001528/UK-inflation-stubbo...

British inflation unexpectedly remained above 3 percent for a sixth month in August, after surprise rises in airfares, clothes, and food prices offset falling petrol costs.

Britons who decided to take a summer holiday abroad faced a 16pc rise in air fares between July and August, especially on European and long-haul routes.

The rise is a record for the period, the Office for National Statistics said.



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Economists had expected annual CPI inflation -- well above the Government's 2 percent target -- to fall to 2.9 percent but it came in unchanged at 3.1 percent.

Inflation was also pushed higher by a jump in the cost of clothing, particularly women's outerwear. The 2.8 percent rise from July to August is the largest for the period since 2001.

While higher wheat prices after shortages created by fires in Russia and floods in Pakistan this summer started to feed through into bread and cereals.

This offset falling petrol costs and second-hand car prices over the month -- in contrast with a steep rises a year earlier -- to keep held CPI inflation flat over the month.

Brian Hililiard of Societe Generale said: "Rather disappointing. I'm not too worried about the volatile items, in particular food, which is a genuine upturn but may not be sustained. The rise in core inflation is more troubling."

Core inflation rose from 2.6 to 2.8 percent -- consensus was for a fall.

"Clearly it plays to the hawks [on the Bank of England's Monetary Policy Committee] rather than the doves but it's just one month's number," Mr Hilliard said.

Andrew Sentance, one of the Bank of England's rate setters, has been calling for a rate rise for months.

Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said: "Today's figures will add to the tensions amongst some MPC members about the current level of inflation and the potential for it to become entrenched in people's expectations."

The Bank of England has forecast that inflation will average 3 percent in the third quarter but expect is to fall toward the end of the year.

Philip Shaw of Investec said: "Overall inflation is stubbornly high and the impact of higher wheat prices has yet to exert itself fully on CPI figures ... The Governor [of the Bank of England] would be well advised to keep his pen out on his desk given that he'll have to write more letters to the Chancellor."

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