June 16 (Bloomberg) -- U.K. inflation slowed less than economists forecast in May after higher taxes and the weakness of the pound sustained price pressures in the economy.

Consumer prices rose 2.2 percent from a year earlier, compared with 2.3 percent in April, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 30 economists was 2 percent. Prices increased 0.6 from the previous month.

Inflation has been “sticky” because of the U.K. currency’s drop in the past year, Bank of England markets director Paul Fisher said last week. Policy makers still predict it will slow further and are spending 125 billion pounds ($204 billion) of newly printed money in U.K. debt markets to prevent deflation from taking hold.

“Inflation has been coming down at a much slower pace than expected,” said Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam and a former U.K. Treasury official. “Even though we’re seeing signs the economy is moving more quickly out of the recession, the bank will remain cautious.”

The pound rose as much as 0.7 percent against the dollar after the release of the figures today and traded at $1.6420 as of 9:46 a.m. in London.

Inflation has now stayed above the central bank’s 2 percent target for 20 months. The monthly increase in prices was twice as much as the 0.3 percent median prediction of 25 economists.

Tax Increases

Higher taxes on alcoholic beverages and tobacco, implemented by Chancellor of the Exchequer Alistair Darling in his April budget, helped push up inflation, the statistics office said. Prices of DVDs and televisions also increased.

Officials said there was anecdotal evidence that import costs have risen on some goods such as cars because of the pound’s weakness.

The U.K. currency fell more than 25 percent against the dollar and the euro in 2008. It has gained more than 11 percent against both currencies this year as prospects for the economy have improved.

Kingfisher Plc, Europe’s largest home-improvement retailer, said on June 2 that first-quarter profit rose more than expected as revenue climbed in the U.K. after it increased prices.

Tesco Plc, Britain’s largest retailer, said today that its “core U.K. business has delivered solid, stable growth in a market where inflation is falling, and our retailing services are continuing to attract new customers.”

Government Crisis

The recession has harmed the prospects of Prime Minister Gordon Brown, who fought off a crisis in his government this month after the ruling Labour party had its worst-ever result in local elections.

The Confederation of British Industry, the nation’s biggest business lobby, said yesterday that the economy won’t resume growth until 2010. Fisher said last week that Britain shouldn’t be “complacent” that the worst is over and said slack in the economy will sustain “downward pressure on prices.”

Evidence has still mounted that the economic slump may be moderating. An index of service industry companies showed expansion in May for the first time in 12 months, and manufacturing expanded in April after the yearlong factory slump came to an end.

RPI Drop

The retail price index, used by wage negotiators as a measure of the cost of living, fell 1.1 percent from a year earlier in May, less than the record 1.2 percent drop in April, the statistics office said. Excluding the cost of home loans, retail-price inflation was 1.6 percent, compared with 1.7 percent the previous month.

The central bank is in its fourth month of pumping money into the economy in order to keep inflation at its target. Policy makers are creating new money to buy bonds and have left the key interest rate at a record low of 0.5 percent.

“The Bank of England’s strategy of quantitative easing is so far proving to be really quite successful in avoiding the risk of deflation,” Julian Callow, chief European economist at Barclays Capital in London, told Bloomberg Television. “The low point in inflation will be around September, when it might get to around 1 percent. That’s unlike the euro area, where inflation is poised to move into negative territory.”

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

Last Updated: June 16, 2009 04:51 EDT