Weak pound sparks inflation rise

The UK's annual rate of inflation showed a shock rise in February after retailers offset higher import costs caused by the weak pound.

The Consumer Prices Index (CPI) rose unexpectedly from 3 per cent in January to 3.2 per cent, according to figures from the Office for National Statistics (ONS) today.

The rise confounded predictions of a sharp drop and resulted in another letter from Bank of England Governor Mervyn King to Chancellor Alistair Darling explaining why inflation is still more than 1 per cent above the Government's 2 per cent target.

Mr King said the "somewhat higher than expected" rise in CPI was likely to be due to the lower pound being passed on to consumers on goods containing a large proportion of imported components.

But he expects CPI to fall back below the 2 per cent target in the coming months as the impact of lower gas and electricity prices come through and the continuing recession bears down on demand.

Today's figures also revealed surprising data for the Retail Prices Index (RPI), which slowed to zero in February from 0.1 per cent in January.

Economists had predicted RPI to have slumped into negative territory by as much as minus 0.7 per cent as a result of the dramatic falls in interest rates and house prices.

But RPI is still at its lowest level since March 1960 in what will be seen as a worrying sign, given its key role in wage negotiations and pension payments.

RPI has fallen by more than the official CPI rate as it also includes housing and mortgage costs, which have reduced dramatically amid the recession.

The ONS said CPI had moved higher due to sharply increased food and drink inflation, which rose by 11.5 per cent on an annual basis in February.

As well as the upward pressure from the weak pound, prices of vegetables were also impacted by a poor crop in Spain.

Transport prices added to the inflation rise, with the average price of petrol rising by 3.2p a litre to 89.5p a litre.

It had been thought that moves from utility firms to lower energy tariffs would have helped bring CPI down, with many in fact fearing a bout of deflation could be on the cards.

While the ONS figures will not allay concerns of falling inflation later this year, the surprising rise in CPI is likely to heighten anxiousness over the impact of the weak pound.

Economists said the latest rise in Consumer Price Inflation was unlikely to deter the Bank of England from continuing with quantitative easing or keeping interest rates at 0.5 per cent for an extended period.

Vicky Redwood, of Capital Economics, said: "Today's inflation figures do not change our view that there is a significant danger of a broad and long-lasting bout of falling prices."

She said there was a good chance that the full £150 billion would end up being used under the Bank's new tactic of quantitative easing - effectively printing money - to boost the money supply.