U.K. Inflation Rate Unexpectedly Rose in February (Update1)

By Svenja O’Donnell


March 24 (Bloomberg) -- The U.K. inflation rate unexpectedly rose in February after higher food costs and the weakness of the pound sustained price pressures even as Britain’s recession deepened.

Consumer prices climbed 3.2 percent from a year earlier, the Office for National Statistics said today in London. The median forecast of 28 economists was for 2.6 percent. Bank of England Governor Mervyn King wrote in a letter to the Treasury explaining the increase from the 3 percent limit that a “sharp decline” in the inflation rate is likely to resume.

Bank of England officials say the higher cost of imports from the British currency’s drop may make inflation volatile while the recession defuses prices pressures in the economy. The bank has started printing money to fight the slump and King told lawmakers today that the outlook for consumer prices will guide how long that policy will last.

“It’s a big surprise,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $230 billion in assets. “We see inflation dropping really quite sharply in next few months” and this data is “a hiccup along the way,” he said.

The pound touched its highest level in more than a month against the dollar. The currency rose as much as 1.4 percent to $1.4779, the highest level since Feb. 10, and was at $1.4669 by 10:28 a.m. in London. The pound has dropped about 26 percent against the dollar in the past year.

Inflation Forecasts

Inflation accelerated from 3 percent in January, the statistics office said. The rate increased for the first time in five months. It has exceeded the median forecast of Bloomberg News’s survey of economists in the past four months.

Prices of food and non-alcoholic drinks increased, boosted by gains in the cost of vegetables after poor crops in Spain of cucumbers and courgettes, the statistics office said. The data also showed the effects of the exchange rate pushed up the cost of imports, influencing this month’s figures.

The pound’s “continued weakness” has forced Ford Motor Company to increase the price of all its models in the U.K. starting next month, the company said in a statement today. Prices for its cars will rise by an average of 3.75 percent.

The U.K. central bank last month forecast that inflation will slow to 0.3 percent in 2011, below the 2 percent target.

Lower energy costs are still eroding inflation pressures. Scottish Power Ltd., the British unit of Iberdrola SA, said on Feb. 27 it will cut U.K. electricity and natural-gas prices on March 31 as wholesale costs decline. Centrica, Britain’s largest supplier, lowered gas prices by 10 percent last month.

‘Volatile’ Outlook

“February’s inflation outturn is somewhat higher than expected,” King wrote to Chancellor of the Exchequer Alistair Darling. “It is likely that over the next year CPI inflation will move below target, although the profile of inflation could be volatile.”

The Bank of England has to do whatever is necessary to get Britain away from disinflation, policy maker David Blanchflower said yesterday.

Retail-price inflation, a measure of the cost of living used in pay bargaining, slowed to 0 percent, the lowest level since March 1960, the statistics office said.

U.K. wage negotiators clinched the smallest annual raises in six years during the three months through February as the recession deepened, a survey by Industrial Relations Services showed last week.

Meanwhile, the economy is still shrinking. Manufacturers’ forecasts for output matched the gloomiest since records began in 1975 as the recessions in the U.K. and overseas wiped out demand for their goods, the Confederation of British Industry said on March 19.

A survey of independent economists compiled by the Treasury last month shows gross domestic product will contract by 2.8 percent this year, almost three times greater than Darling forecast in November.