Bank to explain higher inflation in UK

Inflation rate rose more than expected last month to its highest since the Labour government came to power in 1997 and the Bank of England will now have to explain how it will bring prices back under control.

The Office for National Statistics yesterday said consumer prices rose 0.6 per cent last month, taking the annual rate up to 3.3 per cent from 3.0 per cent in April.

Analysts had expected a reading of 3.2 per cent and last month's figure is the highest since the series began in 1997.

Under the bank's remit, Governor Mervyn King has to write an open letter to the government if inflation deviates more than one percentage point away from the official two per cent target. This has only happened once before - last April - since the Bank was given control of interest rates 11 years ago.

While the spike in inflation will likely reinforce market expectations of higher interest rates ahead, the bank has been expecting the rise. It forecast last month that inflation could rise near to four per cent.

Its policy direction is likely to be guided by the outlook for inflation over a two-year horizon, especially as a slowing economy is expected to tame price pressures.

Mr King blames soaring food and fuel prices which are rising across the world and over which policymakers have little control.

Food and non-alcoholic beverages added 0.14 percentage points to last month's annual rate - the largest contribution. Housing and household services added 0.09 percentage points as utility bills rose.

The bank's dilemma is that growth is slowing at the same time as inflation is rising rapidly, a situation that is being mirrored globally.

Eurozone inflation hit 3.7 per cent this week and the European Central Bank is expected to raise interest rates, perhaps as soon as next month.

US producer prices data are also expected to show an acceleration in raw materials' costs and there has been much speculation the US Federal Reserve will have to raise interest rates later this year, even though the economy is still reeling from a credit crunch that started last August.