UK inflation hits 5 month high

British inflation hit a five-month high in October following a rise in university fees and food prices, making it less likely…

British inflation hit a five-month high in October following 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 tomorrow.

The jump in consumer price inflation to 2.7 per cent from 2.2 per cent 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 today, and came in well above economists’ average forecast of an increase to 2.3 per cent.

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

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“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 US drought and increased food prices to factor in. I don’t think we're going to get anything like the 2 per cent inflation target.”

Former BoE 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 Mr 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 (€469 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 tomorrow even though the bank may have to revise up its near-term inflation forecast after today’s data.

Reuters