Rising oil price drives up UK inflation to 1.5%

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The Independent Online

The surge in petrol prices drove up inflation on both sides of the Atlantic last month, according to official figures yesterday that cemented forecasts of further interest rate rises.

The surge in petrol prices drove up inflation on both sides of the Atlantic last month, according to official figures yesterday that cemented forecasts of further interest rate rises.

But the impact could be short-lived in the wake of the recent fall in crude oil prices, analysts said. Official figures showed that headline inflation in the UK rose to 2.8 per cent in May from April's 2.3 per cent. Meanwhile the inflation rate that the Bank of England targets when setting rates rose to 1.5 from 1.2 per cent, still below the 2.0 per cent target.

The news came just hours after Mervyn King, the Bank's Governor, delivered a warning that interest rates would rise to curb inflationary pressures.

"These data will probably be welcomed by the Bank," said Richard Iley, UK economist at BNP Paribas. "They will help ease its presentational problem in pushing up rates when inflation is mired below target." He said it would strengthen the case for a quarter-point rise in the base rate either next month or in August.

The Office for National Statistics said the increase was due to rising petrol and fuel costs. The average price of a litre of unleaded rose by 4p a litre to 82p in May but fell by 3p a litre a year ago. Since then forecourt prices have fallen below 80p thanks to a fall in crude oil prices and a price war between the main garage chains.

Analysts said that stripping out the oil factor, there was little sign of inflationary pressures. Core inflation, which excludes oil, drink, tobacco and petrol, remained at 2 per cent. "Nevertheless the Bank has shown current inflation is irrelevant," said John Butler, an economist at HSBC. "The big question ... relates to the sustainability of the housing market."

There was a similar story in the US, where government figures showed inflation rose by 0.6 per cent, the largest one-month gain since January 2001 and above market expectations for a 0.4 per cent advance. The so-called core CPI, which strips out food and energy, climbed 0.2 per cent, matching Wall Street forecasts. Over the past 12 months, core inflation has risen 1.7 per cent and economists expect the central bank will begin raising short-term borrowing costs.

Fed policymakers meet on 30 June. Alan Greenspan, the head of the US Federal Reserve, said inflationary pressures were "not likely to be a serious concern". In testimony to a Senate committee yesterday he said that "the removal of an increasingly unnecessary degree of accommodation in monetary policy is very likely to be measured over the quarters ahead".

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