U.K. Inflation Rate Increases to Highest Since 1997 (Update8)
By Brian Swint
Dec. 12 (Bloomberg) -- Britain's inflation rate rose to the highest in at least nine years in November, increasing speculation that the Bank of England will lift interest rates next year.
Consumer prices rose 2.7 percent from a year earlier, the most since the index was introduced in January 1997, after a 2.4 percent gain in October. Economists had expected an increase to 2.6 percent. Consumer prices rose 0.3 percent in the month, led by gains in utility bills and transport costs.
Faster inflation may prompt workers to push for higher wages when collective pay agreements are set in the first quarter. Bank of England Governor Mervyn King has said policy makers will act if companies and workers agree to escalate pay deals.
``It's clear the bank sees this as a significant threat, and that's one reason why they'll raise rates once more,'' Paul Dales, an economist at Capital Economics Ltd. in London.
The pound and interest-rate futures rose as investors stepped up bets on the Bank of England's benchmark rate reaching 5.25 percent next year from the current 5 percent. That would be higher than the euro zone rate, which the European Central Bank increased to 3.5 percent on Dec. 7, and would match the U.S. key rate, which economists expect to be left unchanged today.
The implied rate on the futures contract maturing in March rose 3 basis points to 5.40 percent as of 3:11 p.m. in London, up from 5.3 percent Dec. 4.
The pound rose by the most in six weeks against the euro, gaining as much as 0.5 percent from yesterday's close to 67.34 pence. The U.K. currency also climbed against the dollar, to $1.9678 from $1.9584. It has risen 14 percent so far this year, reaching a 14-year high of $1.9848 on Dec. 1.
Holiday Shopping
Above-target inflation for seven months and higher interest rates are hitting consumers as the holiday shopping season begins. Tesco Plc, Britain's biggest retailer, said last week U.K. sales growth slowed in the fiscal third quarter as price cuts on clothing and alcoholic drinks failed to lure shoppers.
Debenhams Plc, Britain's second-largest department-store company, said today that sales fell in the 14 weeks ending Dec. 10 as shoppers delayed Christmas spending.
Utility bills, transport, recreation and culture costs contributed most to the acceleration in inflation in November, today's figures showed. Household bills rose 11.1 percent from November last year, the biggest gain since the series began.
Retail Prices and Pay
Retail-price inflation accelerated to 3.9 percent in November from 3.7 percent in October, the government said today. Wage negotiators use this index in pay talks. When mortgage interest payments are excluded, the retail-price index rose to 3.4 percent, the highest since March 1993.
``People are struggling to keep up with inflation,'' said Paul Sellers, economic policy adviser at the Trades Union Congress, which represents more than 7 million workers. ``I don't see any inflation-busting pay deals coming up, but pay has proved remarkably stable over the past year and that can't go on forever.''
U.K. employees at Ford Motor Co. and Rolls Royce Plc, as well as air traffic controllers, are set to receive pay increases of more than 4 percent because their wages are linked to the retail-price index, Ken Mulkearn, the editor of Incomes Data Services' pay reports in London, said in an interview. While the median pay increase is still around 3 percent, average wage deals are going up, he said.
Rising Joblessness
Unemployment is also rising, keeping a lid on wages, as around half a million immigrants from Eastern Europe join the workforce. Benefit claims claimed by the unemployed reached a five-year high in October, and wage growth including bonuses was the lowest since January in the third quarter, the statistics office said Nov. 15.
The inflation rate will rise to about 2.7 percent at the end of 2006 before receding, the Bank of England said Nov. 15. Governor Mervyn King said energy costs should decline in the next few months.
The threat of a pickup in wages early next year meant that raising rates last month was justified, Bank of England policy maker Paul Tucker said in a speech yesterday.
To contact the reporter on this story: Brian Swint in London at
[email protected] .
Last Updated: December 12, 2006 10:17 EST