April Inflation Accelerates More Than Forecast to Fastest Pace Since 2008

U.K. inflation accelerated more than economists forecast in April to the fastest since October 2008, forcing Bank of England Governor Mervyn King to explain publicly why officials haven’t raised interest rates yet.

Consumer prices rose 4.5 percent in April after a 4 percent increase in March, data today showed. The median forecast of 32 economists in a Bloomberg News survey was 4.1 percent. Core inflation quickened to the fastest in at least 14 years. King said in a letter to Chancellor of the Exchequer George Osborne that the surge is being driven by higher sales tax and increases in energy and import prices.

The pound rose after the London-based Office for National Statistics reported the inflation data. While King said inflation is likely to rise further in the next few months, he sees it easing toward the bank’s 2 percent target next year. The central bank signaled last week it may need to raise the key interest rate from a record low to control “uncomfortably high” price growth.

“The Monetary Policy Committee judges that attempting to bring inflation back to the target quickly risks generating undesirable volatility in output and would increase the chances of undershooting the target in the medium term,” King said.

‘First Hike’

The pound extended its gain against the dollar after the data, and traded at 1.6269 as of 11:13 a.m. in London, up 0.5 percent from yesterday. The yield on the benchmark two-year government bond was up 3 basis points today at 1.020 percent.

Investors are betting on a quarter-point rate increase in December, according to forward contracts on the sterling overnight interbank average, or Sonia, compiled by Tullett Prebon Plc. Bets have wavered between November and January since last week.

“We believe the market went too far in terms of only pricing the first rate hike for January,” said James Knightley, an economist at ING Group in London, who sees the first increase in November. Still, “with ongoing worries about the sustainability of the economic recovery this suggests the pace and scale of rate hikes will be modest.”

Surging commodity and energy prices, as well as a government tax increase, have kept inflation above the bank’s 2 percent target for more than a year.

‘Substantially Lower’

King said that while it’s “difficult to quantify with precision” the impact of these factors, it is likely that inflation would have been “substantially lower and probably below the target” had they not occurred. In his response, Osborne said the government’s deficit-cutting plan “continues to provide the MPC with the space it needs to target low inflation.” He welcomed the bank’s commitment “to respond flexibly to the economic outlook.”

Today’s data showed consumer prices rose 1 percent in April, matching a record in December 2010. The price gains on the month and the year were led by costs for transport as well as alcohol and tobacco. The statistics office said travel costs were boosted in April by the timing of the Easter holiday. Gas prices also lifted the annual rate.

So-called core inflation, which excludes costs of energy, alcohol, food and tobacco, quickened to 3.7 percent, the fastest since records began in 1997, from 3.2 in March. The same factors driving the headline rate fueled core prices.

Retail-price inflation, a measure of the cost of living used in wage negotiations, slowed to 5.2 percent in April from March’s 5.3 percent. On the month, prices by that measure increased 0.8 percent. Excluding mortgage costs, retail-price inflation was 5.3 percent.

Consumer Impact

King said last week domestic gas prices may rise as much as 15 percent in the second half of 2011 and the first quarter of 2012, while electricity prices may increase by about 10 percent. U.K. energy company Centrica Plc (CNA) said May 9 the cost of gas and power to be delivered later this year is about 25 percent higher than in 2011.

The Ernst & Young ITEM Club said yesterday that high inflation may squeeze households and undermine consumer spending for a decade. J Sainsbury Plc (SBRY), the U.K.’s third-largest supermarket chain, said May 11 it expects economic conditions to remain “uncertain” this year.

The Bank of England’s MPC didn’t have the April inflation data at its meeting this month, when it held its benchmark rate at a record low of 0.5 percent to aid the economic recovery. Minutes of the decision will be published tomorrow, and will show if a four-way split among policy makers persisted.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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