U.K. Inflation Holds Above Bank of England Target

U.K. Inflation Holds Above Bank of England Target

Jan. 15 (Bloomberg) -- U.K. inflation unexpectedly held above the Bank of England's 2 percent target for a third month in December, adding to the case for fewer interest-rate cuts this year.

Consumer prices increased 2.1 percent from a year earlier, the same as in November, the Office for National Statistics said in London today. Economists expected a rate of 2 percent, according to the median forecast of 34 economists surveyed by Bloomberg News. In the month, prices rose 0.6 percent.

Tesco Plc, the U.K.'s biggest retailer, today called for the Bank of England to cut borrowing costs further after its holiday sales growth missed analyst estimates. Policy makers last month reduced the benchmark rate for the first time in two years as the threat to economic growth from higher credit costs outweighed concerns on consumer prices.

``The bank will have to accept that inflation may remain above their target the rest of the year,'' Trevor Williams, chief economist at Lloyds TSB Group Plc in London, said in an interview on Bloomberg Television. ``They will cut in February on the basis the economy is going to slow, but it makes it more difficult for rates to fall below 5 percent.''

The Bank of England last month reduced its benchmark to 5.5 percent and a Bloomberg News survey of Jan. 4 showed most economists expect the rate to fall to 4.75 percent by the end of 2008. The pound, which earlier dropped to a record, climbed as high as 75.54 pence against the euro after the report. It traded at 75.73 pence as of 10:12 a.m. in London.

Food Prices

Oil prices around $100 per barrel and higher food prices are both pushing up Britons' cost of living and fueling inflation. Food prices rose 5.9 percent in December from a year earlier, the cost of liquid fuels such as heating oil jumped 32 percent and furniture costs climbed 0.9 percent, the statistics office said.

Gasoline prices rose to a record last week and consumers have the highest inflation expectations in at least eight years.

Prime Minister Gordon Brown called for wage moderation last week as labor unions started a round of annual pay negotiations. The retail price index, which unions use in wage demands, climbed 4 percent in December from a year earlier, down from 4.3 percent in November. On the month, it climbed 0.6 percent.

``When the extent of underlying inflation pressures isn't apparent it may be hard for policy makers to justify putting rates down,'' said Alan Castle, chief U.K. economist in London at Lehman Brothers Holdings Inc. ``It's a difficult situation for the Bank of England.''

Price Cuts

The central bank nevertheless expects inflation to slow in line with economic growth. Tesco, the U.K.'s largest retailer, said holiday revenue growth slowed from the previous quarter and Finance Director Andrew Higginson said in an interview that a half-point rate cut would be ``good.''

JJB Sports Plc, the U.K.'s second-largest sporting-goods retailer, yesterday forecast a drop in earnings after cutting prices. Clothing and footwear prices fell 3.9 percent, the statistics office said today.

``On balance, we believe that the new figures should not deter the Monetary Policy Committee from cutting rates in February,'' David Kern, chief economist at the British Chambers of Commerce, a group which lobbies for more than 100,000 companies, said after the inflation data was released.

House prices dropped in the fourth quarter for the first time since 2000, according to HBOS Plc, and contagion from the U.S. subprime mortgage slump is making mortgages more expensive.

``The challenge for the Monetary Policy Committee at present is that inflation may rise in the near-term, posing a risk to inflation expectations, and could fall below target further ahead in the event of a sharp slowing in output growth,'' central bank Governor Mervyn King told U.K. lawmakers in testimony on Nov. 29.

BLOOMBERG