Inflation rises unexpectedly

By Christina Fincher and Fiona Shaikh

LONDON (Reuters) - Soaring food prices and a weaker pound pushed inflation well above its 2 percent target last month, but the Bank of England said price growth would still slow sharply as the economic downturn saps demand.

Government bonds dived and sterling shot up Tuesday after the Office for National Statistics said consumer price inflation rose to 3.2 percent in February, despite a recession that has pushed the BoE to adopt unprecedented measures to boost growth.

Inflation was much stronger than even the highest forecast in a Reuters survey and forced King to explain himself to the government, as required by the BoE's mandate when inflation deviates from its 2 percent target by more than a percentage point.

The weakness of sterling was probably to blame, King said. Food and non-alcoholic drink prices were the single biggest driver of the inflation jump. Other sectors depending on imported goods also had an upward effect.

King said policymakers would have to see whether this meant that the upside risks to their forecasts were now coming true, but this still did not mean there was much danger of inflation being meaningfully above target in the medium-term.

"With a 28 percent fall in the exchange rate over 18 months, we clearly expected a good part of that to feed through the domestic price level," King told a parliamentary committee.

"But of course the big picture offsetting, the big downward pressure on inflation, is the degree of spare capacity that has built up."

Analysts by and large agreed. "It doesn't shake our belief that inflation will head significantly below target in the coming months," said Philip Shaw, chief economist at Investec.