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Rising Petrol Prices Fuel Increase in Inflation

Posted on: Wednesday, 17 August 2005, 06:00 CDT

Rising petrol prices sent inflation to its highest level last month since current records began in 1997, according to official figures.

With motorists facing higher fuel bills due to record oil prices, the annual rate of Consumer Prices Index (CPI) inflation rose to 2.3% in July from 2% the previous month.

Experts said the stronger-than-expected data made it unlikely the Bank of England would cut interest rates again this year.

Petrol prices increased by 3.3% over the month and 9.8% on the year, the Office for National Statistics (ONS) said. Recent data from the transport industry revealed motorists were paying an average of more than 90p for a litre of unleaded petrol.

Surging oil prices have fuelled the increase, which was the biggest contributor to the rise in inflation.

Economists said inflation now appeared to have surged ahead of the Bank of England's central forecast, cutting the likelihood of another reduction in the cost of borrowing this year. The Bank cut rates for the first time in two years this month. Philip Shaw, at Investec Securities, said: "The figures are worse than expected. They tend to support our view that the Monetary Policy Committee (MPC) will keep rates on hold for the remainder of the year."

He did not believe the data scuppered the outlook for lower base rates over the medium to long-term, saying rates would probably still be lowered early next year.

In its quarterly Inflation Report last week, the Bank predicted CPI would rise above the Government's 2% target in the short-term. The Bank said it would then ease off before once again passing this level at the end of the two-year forecast period.

Experts had expected annual CPI to rise by 2.1% during July. While they had factored in the rise in petrol price inflation, they said other factors such as "disappointing" summer sales were more surprising.

Furniture prices hardly changed last month, compared with large falls last year, while clothing and footwear discounts were not as big as expected. Excluding the impact of energy costs, CPI inflation still rose by 0.3% to 1.9%.

Source: The Journal - Newcastle-upon-Tyne

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