Soaring inflation shakes rate cut hopes

LONDON (Reuters) - Inflation shot up in July to more than twice the central bank’s target, dousing expectations of interest rate cuts any time soon despite new evidence of sliding house prices and waning consumer demand.

The 4.4 percent annual inflation rate was a record for the 11-year-old series, as was the 0.6 percentage point jump in the price measure from June which took financial markets by surprise. Economists had forecast a rise to 4.1 percent.

The surge above the Bank of England’s 2.0 percent inflation target, driven by rocketing food and fuel prices, would normally argue for a rise in official interest rates. But other data on Tuesday highlighted a rapid fall in house prices and weakening consumer spending that a point to an economy teetering on the edge of its first recession since the early 1990s.

Bank of England policymakers had seen the inflation figures at their meeting last week when they left rates unchanged at 5.0 percent. Their new quarterly forecasts due on Wednesday are almost certain to show a much higher near-term inflation profile -- although their forecast for economic growth is likely to be much lower.

“There is little chance the Monetary Policy Committee will cut rates in the next few months, and indeed, there remains a near-term risk that the MPC will hike rates if inflation expectations surge higher again,” said Michael Saunders, economist at Citigroup.

Yet even after the CPI data, interest rates futures markets attached around a 15 percent chance the Bank will cut rates to 4.75 percent in December, and a more than 50-50 probability rates will be cut in February.

Sterling rallied, sank, then recovered a touch, reflecting the conflicting pressures on the central bank. Sterling was trading around $1.905 and 78.35 pence per euro at 12:25 p.m.

Inflation shot up in July to more than twice the Bank of England's target as food prices rocketed, official data showed on Tuesday, dousing expectations of any near-term interest rate cuts. REUTERS/Graphic


Figures out earlier on Tuesday from the Royal Institution of Chartered Surveyors showed house prices falling sharply and the average number of sales per respondent falling to its lowest level in at least 30 years.

A separate report from the British Retail Consortium showed sales falling 0.9 percent on a year ago in July when measured on a like-for-like basis as consumers cut back on non-essentials.

The chief culprit for the inflation spike was soaring food prices, up a record 13.7 percent on the year as the cost of meat, particularly bacon, ham and poultry, has surged. Bread and cereal prices also shot up, and higher petrol prices played their part as the figures were collected before much of the sharp slide of more than $30 (15 pounds) a barrel in crude oil prices from their peak above $147 in mid-July.

Clothing and household goods prices also did not fall as much as usual in the summer sales, probably because retailers had resorted to early discounting in June, the Office for National Statistics said.

Still, the inflation rate is expected to shoot higher in the next two months due to planned hikes of more than 30 percent in household utility costs.

“Even with the recent drop in oil prices, it still looks possible that inflation will hit 5 percent within two or three months as the latest round of utility price hikes affects the index,” said Vicky Redwood at Capital Economics.

Policymakers were split three ways on rates at their June meeting, with one seeking a raise, one a cut and the remaining seven opting for no change. Minutes of last week’s meeting won’t be available for another week but are likely to show divisions deepening.

The hawks will likely find further ammunition in the news that RPI inflation, on which many wage deals are based, hit 5 percent, its highest rate since July 1991, before Britain started inflation targeting.

Unions are already grumbling at the attempts by the government to keep a lid on public sector wages and further inflation increases will raise the risk of more strikes.

“Teaching assistants, nurses, librarians, care workers, home carers, nursery staff and hospital cleaners are having to cope with the biggest rise in inflation since records began, on a real pay cut,” said Dave Prentis, general secretary of Unison which has more than 1.3 million members.

With just under two years to go before an election must be called, Labour lags the Conservatives by around 20 points in opinion polls.

Additional reporting by Matt Falloon and Nigel Davies; Editing by Ruth Pitchford