Soaring oil prices drive British inflation to record

SOARING oil prices caused British inflation to rise at its fastest rate in eight years during July.

The Consumer Prices Index (CPI) moved up to 2.3% from 2% the previous month - the highest level since records began in January 1997.

It was driven by higher petrol prices, reflecting the recent rise in the cost of crude oil to record levels, the Office for National Statistics said.

The increase was stronger than economists predicted and makes a reduction in interest rates less likely.

In last week’s quarterly Inflation Report, the Bank of England predicted CPI would rise above the Government’s 2% target in the short-term.

It would then ease off before again passing this level at the end of a two-year forecast period.

Petrol prices added 0.13% to the annual rate of CPI inflation. A sharper hike in air and sea fares also had an upward effect. Furniture was another contributor, as prices were little changed this year compared with large falls last year.

In contrast, food prices had a downward effect, with the price of fruit - especially strawberries and grapes - falling more than a year ago.

Meanwhile, the headline rate of Retail Price Index (RPI) inflation, which includes mortgage interest payments, was unchanged at 2.9% in July, while the underlying rate rose to 2.4% from 2.2%.

The price of a barrel of crude oil has risen sharply in recent months, breaking through the $67 mark last week. This has driven the average price of a litre of unleaded petrol above 90p.

Philip Shaw, economist at Investec Securities, said the stronger-than-expected data reduced chances of another interest rate cut this year.

He said: “The figures are worse than expected. They tend to support our view that the Monetary Policy Committee (MPC) will keep rates on hold for the remainder of the year.”

He did not believe the data scuppered the outlook for lower base rates over the medium to long-term.

Mr Shaw said rates would probably still be lowered early next year.

Economist Thushani Gajasinghe, at the Centre for Economics and Business Research, said the figures were likely to rekindle inflationary fears. “The Bank of England will be less likely to cut interest rates again in the near future,” he said.

The MPC cut rates to 4.5% this month, the first reduction in two years.