U.K. Inflation Quickens More Than Forecast on Tuition Fees

U.K. inflation accelerated more than economists forecast in October as higher university tuition fees pushed consumer-price growth away from the Bank of England’s target.

Consumer prices rose 2.7 percent from a year earlier, the fastest since May, compared with a near three-year low of 2.2 percent in September, the Office for National Statistics said in London today. Inflation was forecast to quicken to 2.4 percent, based on the median of 36 estimates in a Bloomberg News survey.

The figures come on the eve of the Bank of England’s quarterly Inflation Report, which may incorporate Governor Mervyn King’s view that annual price gains could remain above the central bank’s 2 percent target “well into next year.” The report, which presents new projections, will also signal how the bank balances the outlook for inflation against the risk of a relapse in growth after policy makers halted expansion of their bond-purchase program last week.

The impact from tuition fees “is dramatically bigger than it should have been,” said Alan Clarke, an economist at Scotiabank Europe Plc in London. “Inflation is probably going to be above target all of next year and there’s a chance it may go above 3 percent. That’s unfortunate for consumers, and it makes it harder for the Bank of England to deliver more stimulus.”

The pound extended its gain against the dollar after the report. It was trading at $1.5886 as of 10:07 a.m. in London, up 0.1 percent on the day.

University Fees

The increase in tuition fees added 0.32 percentage point to inflation last month, according to the statistics office. Lawmakers voted in December 2010 to allow universities to triple fees to up to 9,000 pounds ($14,300) a year, starting with this year’s new student intake, as part of the government’s plan to reduce the budget deficit.

Food and transport costs also pushed up the annual rate in October. Increases in gas and electricity prices announced by some of the country’s biggest utilities over the past few weeks weren’t reflected in the data, the statistics office said.

The U.K. Treasury said in a statement in London the inflation data were “disappointing” and that steps already taken including freezing fuel duty and taking low earners out of tax will ease the pressure on household budgets.

Core inflation, which excludes alcohol, food, tobacco and energy prices, accelerated to 2.6 percent in October from 2.1 percent in September, according to today’s report. That’s the fastest since January.

Economic Outlook

Retail-price inflation, a measure used in wage negotiations, quickened to 3.2 percent from 2.6 percent. The retail-price index excluding mortgage-interest payments climbed 3.1 percent.

While Britain’s economy exited a recession in the third quarter, the recovery remains threatened by the continued crisis in the euro area, the U.K.’s biggest trading partner, and cooling global growth. Manufacturing data last week showed output barely grew in September, indicating the economy’s rebound lost some momentum at the end of the third quarter. Separate services and factory surveys signaled cooling activity in October.

Bank of England policy makers said on Nov. 8 that they don’t plan to buy any more bonds beyond the 375 billion pounds already purchased, concluding a third round of quantitative easing. The next day, the bank said that it will transfer income from gilts it holds under that program to the Treasury in a move that King equates to an easing of monetary conditions.

Factory-Gate Prices

King may be asked at the Inflation Report press conference tomorrow how that transfer influenced the decision of policy makers the previous day.

The statistics office also said today that factory gate prices rose 0.1 percent in October from September, matching the median forecast of 17 economists in a Bloomberg survey. From a year earlier, output prices were up 2.5 percent.

Input prices increased 0.4 percent in October on the month and 0.1 percent on the year. Fuel was the biggest contributor to the monthly increase.

In a separate release, the ONS said house prices rose 1.7 percent in September from a year earlier, down from 1.9 percent in August. Home values “continue to remain relatively stable across most of the U.K., although prices in London are increasing,” it said. In the capital, prices jumped an annual 5.2 percent in September.

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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