Jump in inflation clouds outlook for more BoE stimulus

LONDON Tue Nov 13, 2012 1:39pm GMT

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LONDON (Reuters) - Inflation hit a five-month high in October after a rise in university fees and food prices, making it less likely the Bank of England will flag more stimulus when it presents new forecasts on Wednesday.

The jump in consumer price inflation to 2.7 percent from 2.2 percent in September - the biggest increase in more than a year - also puts in doubt a much hoped-for revival of consumer spending because wages are rising at a much slower pace.

October's figure was the highest since May, the Office for National Statistics said on Tuesday, and came in well above economists' average forecast of an increase to 2.3 percent.

Sterling rose and British government bonds dropped after the data were released.

"Where do we go from here? Onwards and upwards," said Scotiabank economist Alan Clarke. "Utility bill increases are on their way. We've also got the effect of the U.S. drought and increased food prices to factor in. I don't think we're going to get anything like the 2 percent inflation target."

Inflation fell to its lowest since November 2009 in September, but the central bank expected that decline to stall and currently does not forecast price rises dropping below its 2 percent target until the second half of next year.

Former Bank policymaker Andrew Sentance, who voted for higher interest rates before he left the rate-setting Monetary Policy Committee in mid-2011, warned of higher inflation ahead.

"This would reinforce the squeeze on UK consumers and add to concerns about the Bank of England's ability to achieve its price stability objective," said Sentance, who is now a senior economic adviser to accountants PwC.

"If above-target inflation persists through next year, it will add to the pressure on the MPC to raise interest rates sooner rather than later," he added.

Last week the central bank decided not to extend its 375 billion pound ($595 billion) programme of bond purchases as Britain has moved out of recession, although the economy remains fragile.

But many economists still expect more stimulus and see governor Mervyn King striking a cautious tone on Wednesday even though the bank may have to revise up its near-term inflation forecast after Tuesday's data.

EDUCATION COSTS

Some central bankers have voiced concerns about inflation as well as doubts about whether more government debt buying can boost growth at a time of major headwinds including worries about the euro zone debt crisis and a lack of bank credit.

The main driver for October's rise in inflation was an increase in maximum university tuition fees to 9,000 pounds a year from just over 3,000 pounds previously, adding 0.3 percentage points to the inflation rate.

Britain's finance ministry said the rise in inflation was "disappointing". The Labour opposition in parliament urged the government to take action in order to help households.

Higher food prices also added to inflation as bad weather increased prices for potatoes and other vegetables and fruit.

Planned rises in gas and electricity prices later this year are likely to push up inflation in future months.

On Wednesday, the Bank will publish a quarterly update to its forecasts. Economists polled by Reuters had expected the Bank to predict inflation at 1.8 percent and growth at 2.0 percent in two years time - close to previous estimates.

Separate figures published by the ONS on Tuesday showed that factory gate inflation held steady at 2.5 percent. But input cost inflation unexpectedly rose an annual 0.1 percent compared to a forecast 0.5 percent decline.

(Additional reporting by Li-mei Hoang and Olesya Dmitracova; Editing by Hugh Lawson)

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