UK Inflation Strongest In 4 Decades

(RTTNews) - UK consumer prices grew at the sharpest pace in four decades in June and factory gate inflation hit the highest since 1977, raising prospects of a 50 basis point rate hike by the Bank of England at its August meeting.

Consumer price inflation accelerated more-than-expected to 9.4 percent in June on rising motor fuel and food prices, the Office for National Statistics said Wednesday. Inflation was forecast to rise to 9.3 percent from 9.1 percent in May. Inflation was the highest since early 1982. The BoE forecast inflation to peak slightly above 11.0 percent in October.

The BoE had raised the interest rate by a cumulative 1.15 percentage points over the last five rate-setting meetings, citing high inflationary pressures coupled with tight labor market conditions.

High inflation will mean the BoE continues to raise interest rates from 1.25 percent to 3.00 percent, even if the economy falls into a recession, Capital Economics economist Paul Dales said.

"With the Federal Reserve likely to implement another 75bp hike and in light of recent sterling pressure, we narrowly think the committee will opt for a 50bp move next month," James Smith, an ING economist said. Nevertheless, the bank is slowly nearing the end of its tightening cycle.

On a monthly basis, consumer prices gained 0.8 percent, following a 0.7 percent rise in the previous month, ONS data showed.

Core inflation, which strips out volatile energy, food, alcoholic beverages and tobacco prices, eased slightly to 5.8 percent from 5.9 percent.

Another report from the ONS showed that output prices increased the most since September 1977.

Factory gate inflation came in at 16.5 percent in June, faster than the 15.8 percent increase in May and economists' forecast of 16.0 percent. Food products provided the largest upward contribution to the output annual rate.

However, monthly output price inflation slowed to 1.4 percent in June from 1.6 percent in May. This was the second consecutive month that the rate has slowed. Economists had forecast inflation to ease to 1.1 percent.

Input price inflation rose at the fastest pace since records began in January 1985. The annual rate of input PPI increased to 24.0 percent from 22.4 percent in May. The rate was also faster than the economists' forecast of 23.2 percent.

At the same, monthly growth in input prices eased to 1.8 percent from 2.4 percent, but remained above the expected 1.4 percent.