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U.K. Inflation Quickens to Fastest in Nine Months

U.K. inflation accelerated to the fastest pace in nine months in February and factory-gate prices increased twice as much as forecast as energy costs surged.

Consumer prices rose 2.8 percent from a year earlier, compared with 2.7 percent in January, the Office for National Statistics said in London today. That matched the median of 35 estimates in a Bloomberg News survey. Producer prices increased 0.8 percent from the previous month, the most since April 2011.

Higher energy bills and a weaker pound have fueled price pressures in recent months. That’s adding to the squeeze on consumers as they brace for another austerity budget by Chancellor of the Exchequer George Osborne tomorrow. With price gains above the Bank of England’s 2 percent target, Osborne may also flag changes to the central bank’s mandate to give policy makers more flexibility to stimulate growth.

“The economy is going nowhere fast and the BOE has said it will essentially look through above-target inflation,” said Rob Wood, an economist at Berenberg Bank in London. “Whether of its own volition, or because the chancellor tweaks its inflation remit in the budget, we continue to expect the BOE to add more monetary stimulus this year.”

The pound erased its decline against the dollar after the data were published. It was trading at $1.5125 as of 11:28 a.m. in London, up 0.1 percent from yesterday.

Retail Prices

Housing, water, electricity and gas added 0.11 percentage point to annual inflation in February -- the biggest upward impact. That reflects increases in utility bills, the statistics office said.

Today’s report also showed that retail-price inflation, a measure used in wage negotiations, cooled to 3.2 percent in February from 3.3 percent in January. The retail-price index excluding mortgage-interest payments was at 3.2 percent.

Today’s inflation data are the first since the Statistics Authority stripped RPI of its designation as a “National Statistic” after a review found it fell short of international best practice. Two new experimental indexes were introduced today. A variant of the RPI, known as RPIJ, was at 2.6 percent in February. CPIH, which includes a measure of housing costs, was also at 2.6 percent.

BOE Policy

The February data mark the 39th month that consumer-price inflation has been above the Bank of England’s target. Still, policy makers have said it’s right to “look through” the current price surge to aid the economy.

With the BOE signaling openness to more stimulus, that’s put pressure on the pound. Sterling has weakened against 14 of 16 major currencies tracked by Bloomberg this year.

Governor Mervyn King said in an ITV News interview last week that the BOE isn’t trying to talk down the currency and it’s now “broadly stable.” Minutes of the Monetary Policy Committee’s March meeting to be published tomorrow will show if he kept up his push for more bond purchases after he was defeated in a vote in February.

Separate data today showed pipeline price pressures may be building in the economy. Input prices surged 3.2 percent in February from January, the most since March 2011. The increase was led by a 7.1 percent surge in crude-oil costs. From a year earlier, input prices were up 2.5 percent.

“In manufacturing, it is evident that the weaker pound is also hurting producers through increased import costs,” said Chris Williamson, an economist at Markit Economics Ltd. in London. That’s a “worrying side-effect of sterling’s depreciation.”

The 0.8 percent monthly increase in output prices compared with economists’ forecast for a gain of 0.4 percent. The rise was led by petroleum products, which were up 3.7 percent.

Investor Confidence

In another report, the ONS said annual U.K. house-price gains slowed to 2.2 percent in January from 3.3 percent in December. In London, prices rose an annual 5.5 percent.

While the euro area, the U.K.’s main trading partner, is in the grip of a recession, a report in Germany today showed confidence in the region’s largest economy is improving. The ZEW Center for European Economic Research in Mannheim said its index of investor confidence unexpectedly rose to a three-year high of 48.5 in March from 48.2 in February. Economists forecast a decline to 48.1, according to a Bloomberg survey.

Still, political turmoil in Italy and the specter of a bank run in Cyprus are spooking financial markets and threatening to derail an economic recovery. The Stoxx Europe 600 Index (SXXP) fell for a third day.

European Central Bank President Mario Draghi said the “disruptive effects of severe fragmentation in the single financial market have tangible consequences, such as diverging funding costs for banks.” In a speech in Frankfurt, he said the ECB had to identify the most effective tools for repairing these disruptions, “while remaining within its mandate.”

Other data in Europe today were less positive than the ZEW. A contraction in car sales accelerated in February as a steepening decline in Germany, the region’s biggest market, hurt previously resilient Volkswagen AG (VOW), Bayerische Motoren Werke AG and Daimler AG. Registrations dropped 10 percent from a year earlier to 829,359 vehicles, the Brussels-based European Automobile Manufacturers’ Association said in a statement.

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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