April 19 (Bloomberg) -- Consumer prices in the U.K., Europe's second-largest economy, rose at the fastest annual pace in almost seven years in March amid surging fuel costs, reviving speculation for another increase in interest rates.
The inflation rate rose to 1.9 percent, the highest since May 1998, from 1.6 percent in February, the statistics office in London said today. The pound rose and bonds fell as the rate exceeded the 1.7 percent median forecast of 31 economists in a Bloomberg survey.
The bigger-than-expected gain in consumer prices, bringing inflation close to the Bank of England's 2 percent target, boosts the chances of a rate increase in coming months. Two of the bank's nine-member rate-setting committee voted last month to raise interest rates from a three-year high of 4.75 percent.
``It's a warning shot across the bow'' of the central bank, said Simon Rubinsohn, an economist at stockbrokers Gerrard in London who expects an increase in rates in August. ``The MPC envisaged that inflation would reach its 2 percent target, but they didn't expect it would come through quite so quickly.''
The pound rose against the dollar to $1.9093 at 9:34 a.m. from $1.9080 before the report. The 4 1/2 percent gilt due March 2007 fell 0.09, or 90 pence per 1,000 pound ($1,909) face amount, to 99.87, according to Deutsche Bank AG. The yield rose 3 basis points, or 0.03 percentage point, to 4.57 percent.
The rate on the interest-rate future for December rose to 4.93 percent from 4.89 percent, indicating that investors are increasing their bets of an increase in interest rates this year.
Transport Prices
Consumer prices in March rose 0.4 percent in the month from 0.3 percent in February. The median forecast in a Bloomberg survey was for monthly consumer prices to remain unchanged.
Transport prices rose 0.7 percent in the month and 4 percent in the year. They were led higher by airfares and fuels. Airfares rose 5.2 percent in the month and 12.7 percent in the year amid an earlier Easter holiday, the statistics office said. Fuels and lubricants prices rose 2.1 percent in the month and 6.7 percent in the year.
Brent crude oil futures averaged $53.13 a barrel last month, more than $20 higher than the average for the same period last year and reached a record of $56.15 on March 17, based on trading on the International Petroleum Exchange in London.
The cost of raw materials used by British producers rose at a record annual 11.4 percent pace in March, the statistics office said on April 11. Some factories are finding it hard to pass on increased costs amid weaker consumer spending, with the cost of goods leaving factories gaining 2.8 percent in March, the office said.
Bank of England
The Bank of England on April 7 left its benchmark rate unchanged, in part because of what Governor Mervyn King has called a ``marked'' deceleration in consumer spending growth.
The Confederation of British Industry said last month that retail sales fell to a six-month low in March. Its sales index registered minus 9, down from 2 in February and indicating that more companies reported a decline in sales than an increase.
Retail sales, which comprise 40 percent of consumer spending, have barely increased this year, after the biggest December decline in a quarter-century. In February, they rose 0.2 percent in the month. The government reports March sales on April 21.
U.K. shop prices fell 0.2 percent in March from the same month last year, the sixth decline in a row, the British Retail Consortium said on April 7. Its director-general, Kevin Hawkins, said retailers were keeping prices low to stimulate sales growth.
Clothing and footwear prices fell 5.2 percent from a year earlier, the statistics office said.
Tesco
Tesco Plc, the U.K.'s biggest retailer, this month cut 67 million pounds ($127 million) from the prices of 300 products, after 5 million pounds of reductions every week in 2004. It's vying to compete on price with Wal-Mart Stores Inc.'s Asda, which slashed prices by 100 million pounds in April.
The retail price index, used as a benchmark for wage settlements, was unchanged at an annual 3.2 percent, and the index excluding mortgage interest payments rose to an annual 2.4 percent, from 2.1 percent the previous month, the statistics office said.
