LONDON (Reuters) - Rocketing utility bills pushed inflation further above target in February, highlighting the dilemma facing the Bank of England as it grapples with slowing growth and rising price pressures.
The Office for National Statistics said consumer prices rose 0.7 percent last month, taking the annual rate to 2.5 percent, its highest since last May.
Inflation has been running above the government’s 2 percent target since October and economists expect higher oil and food prices to push it even higher in the coming months.
But most economists still expect the Bank to cut interest rates from the current 5.25 percent in the coming months as the global credit crunch is only deepening.
Changes in the way utility bill hikes are phased into the index meant February’s spike had been widely anticipated and market reaction was muted.
“Although higher, this is no worse than markets expected,” said Michael Saunders, economist at Citigroup. “Nevertheless, the Bank of England will remain worried about the effect of rate cuts with high and rising inflation.”
The statistics office announced last month that changes in gas and electricity bills would hit the index immediately rather than being phased in over several months. Without the change in methodology, consumer price inflation would have held steady at 2.2 percent.
Some policymakers may also be heartened by evidence that domestically-generated inflation remains benign.
Core inflation, which strips out oil and food prices, eased to 1.2 percent in February, its lowest rate since August 2006.
However, with oil holding well above $100 a barrel, commodity prices flirting with new records and the pound falling, the external forces pushing inflation higher remain strong.
Sterling’s trade-weighted index posted its biggest one-day fall on Monday since September 1992 and is currently near its lowest in more than a decade.
“February’s fall in core inflation provided some comfort that underlying price pressures in the UK economy remain subdued,” said Jonathan Loynes at Capital Economics.
“But with pipeline cost pressures still strong and inflation expectations still high, inflation concerns will continue to limit the Monetary Policy Committee’s ability to respond to the downturn in the economy.”
The Bank cut interest rates in February for the second time in three months to shore up the economy in the face of a global credit squeeze.
Investors are betting it could be forced to take more aggressive action if financial market turmoil persists. Money markets reflect a good chance rates may be cut by a full percentage point by the end of the year.
However, the central bank may be constrained by concerns over price pressures, particularly after figures last week showed Britons’ expectations of future inflation have risen to a record high.
Editing by Ruth Pitchford