From: Reuters
Published December 18, 2007 05:58 AM

UK inflation steady in Nov, upside risks seen

By Christina Fincher and Matt Falloon

LONDON (Reuters) - Britain's inflation rate unexpectedly held steady in November, official data showed on Tuesday, but price pressures are expected to pick up in the coming months as higher oil and food prices feed through.

Sterling fell as traders, who had expected inflation to rise, bet the Bank of England would have more leeway to cut interest rates should the economy weaken sharply despite ongoing concerns about resurgent price growth.

The Office for National Statistics said consumer prices rose 0.3 percent last month, leaving the annual rate unchanged at 2.1 percent. Analysts had forecast a rise to 2.2 percent, even further above the Bank's two percent target.

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Policymakers face a difficult balancing act as the recent rise in commodity prices means inflation looks set to remain above target for several months even as the economy slows in the wake of the credit crunch.

"We suspect food and energy costs will continue to pose upside risks in the near term," said James Knightley, an economist at ING. "The BoE is likely to remain cautious."

The central bank cut interest rates to 5.5 percent earlier this month and markets are pricing in at least three more quarter-point cuts over the coming year as the economy decelerates.

A fall in the core measure of inflation, which excludes energy and other volatile items, may provide some relief to policymakers. That measure eased to 1.4 percent, its lowest in a year.

"This suggests that a number of retailers feel that they need to contain their prices in order to encourage increasingly pressurized consumers to spend," said Howard Archer, an economist at Global Insight.

PETROL SURGE

The biggest upward impact came from road fuel prices with average petrol prices rising by 3.5 pence per liter over the month compared with a modest fall last year. The annual rate of inflation for fuels and lubricants was the highest in more than two years.

However, there was a downward impact from utility bills as gas and electricity prices continued to come down after huge increases last year. The annual rate of inflation for electricity and gas was the lowest since records began in January 1997 at -5.6 percent.

Still, utility bills are unlikely to exert a downward influence for long. Oil prices have soared close to $100 a barrel in recent weeks and several energy companies, including British Gas and npower, have recently increased tariffs on their tracker products.

However, the retail price index -- on which many wage deals are based -- rose unexpectedly to 4.3 percent from 4.2 percent. RPIx, the measure which excludes mortgage payments, also rose unexpectedly to 3.2 percent from 3.1 percent.

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