Inflation Holds at Its Fastest Pace Since 2008; Weale Seeks Rate Increase

U.K. inflation held at the fastest pace since October 2008 last month as Bank of England policy maker Martin Weale repeated his call for higher interest rates.

Consumer prices rose 4.5 percent in May from a year earlier, matching the increase recorded in April and the median forecast of 30 economists in a Bloomberg News survey, the Office for National Statistics said today in London. Core inflation eased to 3.3 percent from 3.7 percent.

The Bank of England kept its benchmark rate unchanged at a record low last week as concerns about a faltering recovery took precedence over an inflation rate that’s more than twice its 2 percent target. Weale said late yesterday there’s a “substantial risk” that inflation will accelerate to more than 5 percent this year and that recent “softer” data hasn’t changed his view on the need for rate increases.

“We still think the bank will look through the short-term spike,” said Hetal Mehta, an economist at Daiwa Capital Markets Europe in London, noting that the decline in the core rate will be “reassuring” for policy makers who favor no change in interest rates. “We’re expecting very subdued economic growth in the second quarter. The recovery is still fragile.”

The pound remained higher against the dollar after the report and was at $1.6396 as of 9:57 a.m. in London, up 0.1 percent from yesterday. Bonds declined, with the yield on the 10-year gilt up 3 basis points at 3.28 percent.

Transport Costs

On the month, consumer prices rose 0.2 percent in May from April. The largest upward impact on the annual rate came from prices for food and non-alcoholic drinks, the statistics office said. The biggest downward effect was from transport costs, with airfares dropping by 11.1 percent on the month due to the timing of Easter.

Retail-price inflation, a measure of the cost of living used in wage negotiations, held at 5.2 percent in May. On the month, prices by that measure rose 0.3 percent. Excluding mortgage costs, retail-price inflation was 5.3 percent.

Higher energy and raw-material costs have put pressure on U.K. consumers. Bank of England Governor Mervyn King said on May 11 that “there is a good chance that, if utility prices rise further later in the year, inflation will reach 5 percent.”

Iberdrola SA’s Scottish Power unit has said it will raise domestic gas prices by 19 percent and electricity charges by 10 percent from August.

‘Well-Anchored’

Data from China today showed inflation there accelerated to 5.5 percent in May, the fastest pace in almost three years, sustaining pressure for a further interest-rate increase.

In the U.K., the Bank of England held off raising interest rates as the economy stagnated in the six months through March. Surveys this month showed that manufacturing and services growth cooled in May.

Writing in the bank’s quarterly bulletin, published yesterday, Chief Economist Spencer Dale said that while Britons’ outlook for inflation is “reasonably well-anchored,” public satisfaction “with the way in which the bank has set interest rates to control inflation has declined since the middle of 2010.”

The Monetary Policy Committee has split on the direction of policy, and minutes of this month’s decision will be published on June 22.

In a speech in London, Weale said while there is “as yet no substantial evidence that expectations of above-target inflation are being built in to people’s behavior, there is a strong case for the MPC to pre-empt this risk rather than wait for it to materialize.”

There are “significant risks” to delaying a rate increase, he said.

To contact the reporter on this story: Svenja O’Donnell in London at sodonnell@bloomberg.net

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

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