UK inflation reaches target set by Bank of England

LONDON: UK inflation rates reached its targeted 2 per cent in February, official data showed Tuesday. According to the Office for National Statistics, consumer prices rose 0.3 per cent in February, thereby achieving the target set by the Bank of England for the first time since June 2005.

The annual rate of inflation was at 1.9 per cent both in December and January.

Economists felt there is a remote chance of the inflation going up in the coming months because of the phenomenal increase in energy charges.

However, going by the central bank’s own projections, the CPI annual rate is expected to be flat at 2 per cent through the next two years.

The bank forecasts could mean relatively robust GDP growth estimate — 2.7 per cent in 2006 and 3.1 per cent in 2007.

According to the ONS, the inflation went up for the first time in five months as retail stores stopped offering discounted prices on items such as books and furniture. Costs of recreation and culture, in which book prices are included, rose 0.8 per cent in the month, adding 0.2 percentage point to the annual index. Prices of furniture, furnishings and carpets gained 0.4 per cent, adding 0.02 percentage point. Computer games prices too were higher.

Despite the worries about the long-term impact of high energy prices, the increase in February rate was contained by a lower rate of increase in the price of petrol. The ONS said the average price for a litre of petrol rose by 0.4 pence in February compared to an increase of 0.6 pence per litre a year earlier.

Prices gained 0.3 per cent during February in housing, water, electricity, gas and other fuels, adding 0.01 percentage point to the annual index. Natural gas prices were 60 per cent higher on an average compared with February 2005, while crude oil gained 19 per cent in the past year, the ONS said.

Goods prices went up 0.6 per cent, compared with a 0.3 per cent increase the month before.

Inflation was curbed by a decline in air fares, falling 1.9 per cent in the month as the winter holiday season ended. That knocked 0.1 percentage point off the overall index.

The ONS expects the inflation to go up further in March as there have been increases in energy prices.

Meanwhile, a survey by the central bank showed that households’ inflation expectations increased in the past quarter — the median expectation for the inflation rate over the next 12 months rose to 2.6 per cent, from 2.2 per cent in a November survey.

The Retail Price Index, which includes housing costs, and which is used to determine pensions, wage claims and index-linked contracts, was up 2.4 per cent in February, unchanged on the previous month.

The ONS also said it would be publishing two new indices intended to track the impact of changes in indirect taxes on inflation. The CPIY is intended to measure movements in “underlying” prices, excluding price changes considered to be directly the result of changes in indirect taxation.

The other new index is CPI at constant tax rates (CPI-CT), which is an analytical tool to determine the contribution of tax changes to the overall CPI inflation figures.