UK Inflation Holds Steady at 2.1% in November

UK inflation held steady at 2.1 per cent in November despite fears it would be fuelled by rising food and fuel prices, giving the Bank of England more leeway to cut interest rates if the economy slows rapidly at the start of next year.

The Office for National Statistics on Tuesday said that consumer prices rose 0.3 per cent last month, keeping the annual rate of inflation unchanged at 2.1 per cent, just above the Bank’s 2 per cent target. Analysts had forecast a rise to 2.2 per cent.

The relatively modest reading will be a relief for policymakers, who cut interest rates to 5.5 per cent this month although public expectations of inflation were running at their highest level on record.

The pound fell as traders factored in a higher chance of a further rate cut early in the New Year. Jonathan Loynes, an analyst at Capital Economics, said the figures were an encouraging signal that inflation pressures will not prevent the MPC from responding to the weakening outlook for the economy”.

As expected, the biggest upward effect on inflation came from higher petrol prices, which rose to over £1 a litre in November, reflecting the recent surge in oil prices. The largest downward effect came from unchanged energy bills, compared with last year’s phasing in of higher tariffs.

Since energy bills appear likely to rise if oil prices persist, analysts and the Bank itself expects inflation to remain above target in the short term.

But economists said a drop from 1.5 per cent to 1.4 per cent in core inflation - excluding energy and food prices - was encouraging, although the Bank has in the past been reluctant to distinguish between headline and underlying inflation.

However, inflation on the retail prices index, often used as a guide for wage settlements, rose unexpectedly from 4.2 per cent in October to 4.3 per cent in November.

UK Inflation Holds Steady at 2.1% in November

Financial Times
12/18/2007 6:23:07 AM