U.K. Inflation Stays Above BOE Goal

U.K. inflation held at the highest rate since May last month as increases in gas and electricity bills helped to keep consumer-price growth above the Bank of England’s target.

Consumer prices rose 2.7 percent from a year earlier, the same as in November and October, the Office for National Statistics said today in London. That matched the median estimate of 36 economists in a Bloomberg News survey. Housing and utility costs added 0.26 percentage points to inflation. From the previous month, prices rose 0.5 percent.

Britain’s economy is struggling to recover after emerging from a double-dip recession in the third quarter. Still, with inflation above the Bank of England’s 2 percent goal, that may leave some of the Monetary Policy Committee reluctant to support more stimulus to help bolster growth.

“Inflation could pick up a bit further in the near-term, quite possibly reaching 3 percent,” said Vicky Redwood, an economist at Capital Economics in London. “It will probably stay relatively high for most of this year, prompting households’ real pay to fall again in 2013. But we continue to expect inflation to fall back below its target towards the end of the year.”

The pound pared gains against the dollar after the report and was trading at $1.6087 as of 9:56 a.m. in London, up 0.1 percent on the day. The yield on the benchmark 10-year U.K. government bond was little changed at 2.04 percent.

Transport Costs

The statistics office said that clothes prices also had an upward effect on inflation last month. The largest downward impact came from transport costs, predominantly air fares and gasoline, which subtracted 0.23 percentage points from the rate.

Core inflation, which excludes alcohol, food, tobacco and energy prices, slowed to 2.4 percent in December, the least in three months, from 2.6 percent in November. Retail-price inflation, a measure used in wage negotiations, accelerated to 3.1 percent from 3 percent. The retail-price index excluding mortgage-interest payments rose an annual 3 percent.

The Bank of England has forecast that inflation will cool gradually this year, easing the squeeze on consumers. Still, there has been upward pressure in recent months from price increases by Britain’s biggest utility companies, including SSE Plc and Centrica Plc, the owner of British Gas.

Funding Program

BOE policy makers held their target for bond purchases at 375 billion pounds ($603 billion) last week as they assessed the impact of their credit-boosting Funding for Lending Scheme. The central bank will publish new forecasts for growth and inflation next month that will inform the MPC’s February decision.

HSBC Holdings Plc said yesterday that it expects inflation to average 2.7 percent this year. It also sees no more bond purchases by the MPC.

“More money creation now risks further distorting financial markets and the economy for little real gain,” said Simon Wells, chief U.K. economist at HSBC in London. “And another year of above-target inflation will strengthen the widely-held view that the MPC has abandoned its inflation target. The hurdle for more monetary easing should be high.”

Also today, the statistics office said U.K. house prices rose 2.1 percent in November from a year earlier, up from a 1.5 percent annual gain in October. The Royal Institution of Chartered Surveyors said in a report today that real-estate agents have become more optimistic about the property market and that its house-price gauge rose to a 2 1/2-year high in December.

Output Prices

Separate ONS data showed U.K. factory output prices fell 0.1 percent in December from November, led by a drop in petroleum products. The median forecast of 18 economists in a Bloomberg survey was for no change. From a year earlier, factory-gate price inflation accelerated to 2.2 percent from 2.1 percent.

Core producer prices, which exclude costs of food, alcohol, tobacco and petroleum, were unchanged on the month and rose 1.5 percent from a year earlier.

Input costs fell 0.2 percent in December from November and increased 0.3 percent on the year. The biggest downward impact on the monthly and annual change was from crude oil.

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