Soaring Oil Prices Push Inflation To Eight-Year High 16/08/2005
Official figures released today revealed that Britain's inflation rate rose to an eight-year high in July. The annual consumer price index (CPI) rose 2.3% in July, up from 2.0% in June and above the government's 2.0% inflationary target for the first time since its implementation in December 2003.
The Office for National Statistics reported that soaring oil prices contributed significantly to the rise, with additional upward pressure coming from air and sea travel and furniture.
The Bank of England did predict that inflation would surpass the government's target of 2.0% before falling beneath the target again soon after, in its inflation report released earlier this month, citing higher energy costs as the probable cause.
A less severe rise was expected amongst economists and City analysts of about 2.1%, but this sharper rise has caused surprise and has probably diminished the chances of a further reduction of interest rates in the near future.
Howard Archer, chief UK economist at consultancy Global Insight, believes that the Bank of England will be far from happy with the figures. He said, "This will not please the Bank of England at all, and significantly diminishes the prospects of another interest rate cut before the end of this year."
Thushani Gajasinghe, an economist at the Centre for Economic and Business Research, believes that the figures will not impact significantly on the economy. He said, "The Bank of England will be less likely to cut interest rates again in the near future. However, markets were expecting this rise in inflation and therefore will not be greatly affected."
The major concern is over the continuing rise in oil prices driven by a combination of concerns over security in the Middle East, buoyant demand and the lack of refinery capacity. Petrol prices have starting hitting £1 a litre in some regions of the UK in order to offset the rise in costs for the suppliers (petrol stations).
The news also comes as a blow to borrowers and would-be home buyers who were hoping for a series of rate cuts that would lower their repayments and give first-time buyers a better opportunity to gain a foothold in the market. Retailers will also be disappointed, as they were hoping for further rate cuts to encourage shoppers to return to the High Street and start spending again.
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