UK Consumer Prices Rise Unexpectedly

Annual consumer price index rose to 3.2 percent in February as higher prices for food and fuel and a weaker pound offset the deflationary effects of the economic crisis.

LONDON (AP) -- The cost of living in Britain rose unexpectedly in February as higher prices for food and fuel and a weaker pound offset the deflationary effects of the economic crisis, official data showed Tuesday.

The annual consumer price index rose to 3.2 percent from 3.0 percent in January, the Office for National Statistics (ONS) said. Most analysts were expecting that rate to drop as weaker demand amid the economic crisis causes retailers to cut prices to attract shoppers.

Rising prices for food and drink, recreation and transport -- mainly higher fuel costs -- pushed the consumer price index (CPI) higher after four consecutive months of falling. The government's policy is to hold consumer price inflation at about 2 percent.

The governor of the Bank of England, Mervyn King, said the lower value of sterling, which raised the price of imported goods and components, was a key factor in pushing consumer prices higher.

"It is likely that over the next year CPI inflation will move below target, although the profile of inflation could be volatile," King said in the letter he is required to write to the Treasury chief every time the CPI inflation rate exceeds 3 percent.

Retail price inflation -- which includes housing costs -- fell from 0.1 percent in January to zero, mainly because of the fall in variable mortgage interest rates as the Bank of England cut rates to stimulate the economy.

The underlying rate of retail price inflation rose to 2.5 in February from 2.4 in January.

Many economists had expected the retail price index to fall into negative territory in February for the first time since March 1960, as slumping demand causes market prices to fall.

Howard Archer, chief European economist at Global Insight, said February's report reduced the likelihood of deflation setting this year, although the low retail price index means workers are likely to accept lower pay.

"Given that many pay awards are still linked to retail price inflation, the flat year-on-year level in February will maintain the downward pressure on wages already coming from soaring unemployment and companies' deteriorating profitability," Archer said.

Honda, which has suspended auto production in Britain for four months, is the latest to propose a wage cut to workers. Dave Hodgetts, Honda's director of planning and business, told workers that the company proposed a one-year wage cut to preserve jobs while it struggles through the downturn.

Jim D'Avila, regional officer for the United union, said its priority was to preserve jobs at Honda. "Therefore the union will be entering into negotiations with management. We intend to ensure that these discussions are genuine negotiations which seek to produce a realistic outcome."

As consumer prices rose in February, so did home loan approvals, according to separate statistics released Tuesday.

The British Bankers' Association said home mortgage approvals increased in February, to 28,179 from 24,278 in January. While higher, the number was still 31 percent lower than in February 2008, reflecting the dismal state of the British housing market.

"Most new mortgage lending is being done by the high street banks but demand is, of course, being moderated by the impacts of the recession," said David Brooks, the association's director of statistics.

"Remortgaging activity has slowed in recent months, while higher numbers of loans approved for house purchase simply reflect the banks' greater market share."

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