May 13, 2008 / 9:19 AM / 12 years ago

Inflation leaps to 3 percent in April

LONDON (Reuters) - Soaring food and fuel bills pushed up the inflation rate by its biggest amount in nearly six years, further denting expectations of interest rate cuts despite a slowing economy.

A man uses a petrol pump with a "maximum usage of twenty pounds" sign on at a petrol station in Linlithgow, Scotland April 24, 2008. REUTERS/David Moir

The Office for National Statistics said consumer prices leapt 0.8 percent last month from March, pushing the annual rate up by half a percentage point to 3.0 percent. Analysts had expected a rate of only 2.6 percent.

The pound jumped more than half a cent and interest rate futures tumbled as dealers ratcheted down the probability of further interest rate cuts soon.

“It was a pretty horrific headline number ... and limits the scope for monetary easing from the Bank of England. It will be hard for them to cut in June,” said Lee Hardman, currency economist at BTM-UFJ.

Bank of England Governor Mervyn King is now a whisker away from having to write to the government explaining how he plans to bring prices back under control — as required by the central bank’s remit if inflation exceeds 3 percent.

King and his fellow policymakers are in a difficult position. They have an inflation problem as seen in the latest figures and other data on Monday showing manufacturers ramped up prices at their sharpest rate in at least 22 years.

But the economy is slowing fast. An influential housing market survey earlier on Tuesday showed at its weakest level ever as the property market downturn continues to gather pace.

The inflation numbers are also a headache for embattled Prime Minister Gordon Brown as Britons become increasingly fed up with their daily costs becoming ever dearer.

Chancellor Alistair Darling called earlier this week for coordinated international action to bring food prices down as the Labour Party’s popularity dives.

Food and drink prices rose by the highest annual rate since records began in 1997, adding 0.12 percentage points to the overall inflation rate. Household bills added another 0.18. These upward effects are likely to continue over the next few months as global prices for commodities such as oil and food are showing no signs of coming down yet.

The Bank will publish its new forecasts on Wednesday and attention will now focus on where it sees inflation in two years’ time and how marked the economic slowdown will be.

“Given the Bank of England targets inflation on a two-year horizon, there is scope of further policy easing, but the risk is that this gets delayed further into 2008 and 2009,” said James Knightley, economist at ING.

Reporting by Sumeet Desai and David Clarke, editing by xxx

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