Surging British inflation stokes rate hike prospect

British inflation soared to 4.5 per cent in April, official data showed yesterday, hitting a two-and-a-half-year high and stoking the prospect of an interest rate hike from the Bank of England.

Consumer Prices Index inflation – the government’s target measure – hit the highest level since September 2008, when it hit 5.2 per cent, the Office for National Statistics said in a statement.

April’s reading, which followed a rate of four per cent in March, overshot market expectations of 4.2 per cent, Dow Jones Newswires said.

The cost of living jumped on the back of soaring prices for air, sea and rail tickets over the Easter holiday break. Inflation was also propelled by rising prices for alcoholic drinks, tobacco, and domestic gas and electricity.

In reaction, the British pound leapt against the euro and the dollar, as dealers bet on the increased likelihood of a near-term hike in interest rates.

“Today’s higher-than-expected jump... increases the pressure on the monetary policy committee at the Bank of England to act sooner rather than later with respect to a rise in interest rates,” said analyst Michael Hewson at traders CMC Markets.

Despite high inflation, the central bank has refrained from hiking its key lending rate from a record low 0.50 per cent because of Britain’s weak recovery from recession. Rates have remained on hold for more than two years.

Inflation over 12 months has now held above the Bank of England’s official target rate of two per cent since December 2009.

“Inflation leapt further away from the BoE’s target,” noted Manoj Ladwa, senior trader at ETX Capital, but he struck a more cautious tone over the interest rate outlook.

“Given the fragility of the economic recovery, the Bank of England has accepted stubbornly high inflation takes a back seat to economic growth.”

The ONS added yesterday that the data was influenced by Easter, when many families traditionally head out on holiday.

“The timing of Easter in 2011 had a significant impact on certain travel costs included in the CPI due to the collection periods for air transport, sea transport and international rail travel including the Easter holidays.

“Easter in 2010 was much earlier and did not affect the April 2010 CPI,” it added.

In recent months, inflation has also been propelled by surging world oil prices and a recent increase in government sales tax.

The central bank last week warned that inflation could reach five per cent this year because of soaring domestic energy costs, high oil prices and the government’s sales tax rise that was implemented in January.

The BoE, and also the European Central Bank for the eurozone, have set a target for inflation of no more than two per cent because experience shows that once it rises above this level, businesses and consumers begin to anticipate further price rises, generating what is known as second-round inflation.