UK sales fail to dispel worries over inflation threat

UK sales fail to dispel worries over inflation threat

June's High street summer sales and falling petrol costs in the UK failed to dispel worries over a lingering inflation threat today.

Official figures showed the Consumer Prices Index (CPI) benchmark falling from 3.4% to 3.2% over the month thanks to record price-slashing by retailers and a 2.6p a litre drop in petrol costs.

But the figure remains well above the Bank of England's 2% target while "core" CPI - excluding volatile elements such as food and energy costs - rose from 2.9% to 3.1%.

The pressure on motorists at the petrol pump may have eased, but the data showed a huge rise in car insurance costs - up 36% on a year earlier in June after a record 5.7% rise in premiums over the month.

Other factors pushing up underlying inflation were sharp rises in airfares to European and long-haul destinations - including South Africa as ticket prices doubled due to the World Cup.

Despite the fall in the overall inflation rate, the underlying price pressures will add to the debate on the Bank of England's Monetary Policy Committee (MPC)

CPI remains well above the Monetary Policy Committee's (MPC) 2% target and has stayed at 3% or higher throughout 2010. Inflation is set to rise again when VAT is hiked to 20% next January.

Although the recovery from a record recession is still fragile, MPC hawk Andrew Sentance voted for a rate hike for the first time in almost two years in June.

The MPC has left monetary policy unchanged since last November, with interest rates at a record low of 0.5% and £200bn (€240.18bn) pumped into the economy - although Mr Sentance believes the world has "changed significantly" and it is time to gradually withdraw the emergency support.

He told an audience in Reading today that worries over an uneven recovery should not be confused with signs of a double-dip recession, which he said was "not on the cards".

He added: "The world economy has bounced back, demand is recovering in the UK, there is less spare capacity than we feared and inflation has been higher."

Barclays Capital chief economist Simon Hayes said pressure for a hike from rate-setters was likely to mount barring sudden shocks to the global economy. He said: "The resilience of inflation seems set to remain a thorn in the side of the MPC.

"If CPI inflation remains well above the 2% target for the next 18 months, as in our forecast, it will be difficult for the MPC not to respond with a hike in the policy rate."

Mr Hayes added: "So long as the committee remains concerned about downside risks to growth - from consumer and business reactions to fiscal consolidation and demand from overseas - we expect policy forbearance to continue.

"However, in the absence of any further nasty economic surprises the momentum behind a rate hike is likely to grow during the second half of the year."

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