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Soaring Fuel Prices Set Inflation Record; Interest Rate Fall Looking Less Likely

Posted on: Thursday, 18 August 2005, 06:00 CDT

SOARING oil prices caused inflation to rise at its fastest rate in eight years last month.

The Consumer Prices Index moved up to 2.3% in July from 2% the previous month - the highest level since records began in January 1997.

Inflation was driven by higher petrol prices, reflecting the recent rise in the cost of crude oil said the Office for National Statistics.

The increase was stronger than economists had predicted and will make another reduction in interest rates look less likely.

In its quarterly Inflation Report last week, the Bank of England 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.

Yesterday's official data showed higher petrol prices added 0.13% to the annual rate of CPI inflation. A sharper hike in the air and sea fares also had an upward effect.

Furniture was another contributor as prices were little changed this year compared with large falls last year.

In contrast, food prices had a downward effect on inflation, with the price of fruit especially strawberries and grapes falling more than a year ago.

Meanwhile, the headline rate of Retail Price Index inflation, which includes mortgage interest payments, was unchanged at 2.9% in July, while the underlying rate rose to 2.4% from 2.2%.

The price of a barrel of crude oil has risen sharply in recent months, breaking through the $67 mark last week. This has driven the average price of a litre of unleaded petrol on some garage forecourts across North Wales above 90p.

Philip Shaw, economist at Investec Securities, said the stronger- than-expected data reduced the chances of another interest rate cut this year. The Bank of England's Monetary Policy Committee cut rates to 4.5% this month, the first reduction in two years.

He said: "The figures are worse than expected. They tend to support our view that the 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.

Economist Thushani Gajasinghe, at the Centre for Economics and Business Research, said the figures were likely to rekindle inflationary fears.

"The Bank of England will be less likely to cut interest rates again in the near future," he said

Source: Daily Post; Liverpool

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