BENCHMARK UK inflation surged from 2.2% in January to 2.5% last month - even further above the Bank of England's 2% target - as National Statistics moved to reflect household fuel price hikes immediately instead of phasing them into the figures.
February's 2.5% figure for annual consumer prices index inflation was the highest since May 2007, but it was bang in line with City expectations. Higher domestic electricity and gas bills added 0.36 percentage points to the annual CPI rate between January and February - by far the biggest impact in either direction.
Members of the Bank of England's Monetary Policy Committee, who are having to weigh the prospect of a sharp UK economic slowdown, or worse, against inflationary dangers in setting interest rates, may be relieved that yesterday's CPI numbers did not surprise on the upside. Factory gate prices have been leaping, but yesterday's figures show retailers have at least for now been absorbing some of these increases in profit margins.
Excluding energy, food, alcohol and tobacco, core annual CPI inflation edged down from 1.3% in January to an 18-month low of 1.2% last month.
Jonathan Loynes, chief European economist at consultancy Capital Economics, noted core goods prices were showing an annual fall of 1.4% in February.
National Statistics pointed out yesterday that gas and electricity price changes had been phased in over a four-month period previously to reflect the fact they did not change for customers until the day the meter was read. Such price changes are now implemented in their entirety when they are made by suppliers.
A small downward impact on annual CPI inflation between January and February - of 0.05 percentage points - came from food. Fruit prices fell, compared with a rise in February last year, with the largest individual contribution coming from strawberries. Vegetable prices rose by less last month than in February 2007.
Howard Archer, chief UK economist at consultancy Global Insight, said the fall in core inflation suggested "many retailers felt that they needed to contain prices in order to encourage increasingly pressurised consumers to part with their money".
MPC members' central forecast, published in the February inflation report, is that annual CPI inflation will exceed 3% around the middle of this year.
Archer expects this will happen, as higher household fuel bills, rising food costs, and a weak pound combine to push up inflation.
Highlighting the dilemma facing the MPC, he declared: "Significantly-higher consumer price inflation in February reinforces the belief that the Bank of England would prefer not to cut interest rates by a further 25 basis points to 5% until at least May.
"However, there is now a very real possibility that the Bank could be forced into acting in April if liquidity remains very tight and money market interest rates elevated. Significantly, (MPC) members have highlighted that tight credit conditions pose a particularly serious downside risk to consumer spending, business investment and the housing market over the coming months."
Archer yesterday cut his forecasts for UK growth in both 2008 and 2009, and now expects expansion of only 1.6% in each year.
He noted this was significantly adrift of even the reduced forecasts of Chancellor Alistair Darling in last week's Budget, of gross domestic product growth of between 1.75% and 2.25% in 2008 and 2.25% and 2.75% in 2009.
The MPC has cut UK base rates by a quarter-point twice so far this cycle, on December 6 and February 7, to take them to 5.25%.
Loynes said: "Core inflation could yet pick back up again ... as the sharp increases in producer prices seen over the last year or two work their way along the inflation pipeline. For core goods inflation to remain at current rates, retailers' margins would have to take an absolute hammering. We suspect that this will happen, but the MPC may want to err on the side of caution."
He added: "Overall, it seems very likely that concerns about the inflation outlook will continue to limit the pace at which the (MPC) feels able to cut interest rates over the coming months. We still expect rates to fall at the relatively modest rate of one (quarter-point) cut every three months for the remainder of this year, meaning that monetary policy will be restrictive for most of the year. The result will be weaker growth, and eventually even lower interest rates, in 2009."
The old all-items retail prices index measure of inflation, still used in wage bargaining, was flat at 4.1% between January and February.
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