UK inflation rate rises to 3.4%

The UK inflation rate rose sharply to 3.4% in March from 3% the month before, official figures have shown.

The rise in the Consumer Prices Index (CPI) inflation rate was greater than analysts had expected.  Retail Prices Index (RPI) inflation, which includes housing costs, also rose sharply to 4.4% in March from 3.7%.  The CPI inflation rate is the measure targeted by Bank of England interest-rate setters, while RPI is often used as a benchmark in wage negotiations.

Higher petrol prices were an important factor in rising consumer prices, the Office for National Statistics (ONS) said.  Petrol prices have been rising because of the relative strength of the dollar and higher refining costs, as well as the increasing price of oil which hit 18-month highs at the start of April.

The continuing impact of the rise in VAT, which went back up to 17.5% in January, and the effect of flat gas bills relative to this time last year, when they fell sharply, also contributed to the spike in inflation.

The ONS said increasing air fares, especially on European flights, rising food and non-alcoholic drinks prices, and higher clothing and footwear costs also played a part.  Offsetting these were falls in the prices of second-hand cars, furniture and household equipment.

Despite the sharp rise in prices, analysts expect the rate of inflation to fall again in the coming months, as weak economic growth and high unemployment dampen price rises.  The governor of the Bank of England, Mervyn King, has said that he expects inflation to fall back towards the target rate of 2% in the coming months.

Analysts therefore expect the Bank to keep interest rates low to stimulate growth.

"We would not expect the Bank of England to be swayed by short-term movements in commodity prices, so today's figures should not have much bearing on interest rates. We still expect rates to remain on hold for the remainder of this year," said Hetal Mehta, senior economic adviser to the Ernst & Young ITEM Club.

UK interest rates have been at the record low of 0.5% for 13 consecutive months.  The policy helped to bring the UK economy out of recession in the last quarter of 2009, when it grew by 0.4%.  However, if prices continue to rise sharply, the Bank's Monetary Policy Committee may have to raise rates.

If the CPI inflation rate remains above 3% in April, Mr King will have to write another letter of explanation to the chancellor.

Posted at 08:08PM Apr 20, 2010 by Kelly Board in The Economy  |  Comments[0]

Air Restrictions Costing Millions

BAA, the operator of several major UK airports including Heathrow and Stansted has announced today that it is losing as much as £6m per day due to the air space closures caused by the volcanic ash cloud.

BAA operates six UK airports, have also said however, that they do not expect a ‘material impact’ on their finances as a result of the sudden unforeseen losses.

Furthermore, Aer Lingus, the Irish airline has said that the flight disruption is also having a large impact on their finances as they have already lost 15-20m Euros in the 5 days since the air space was closed.

On a positive note for the company, Aer Lingus added that it had "substantial cash reserves" and could "withstand a sustained closure of airspace".

Today has seen the start of a small recovery, as flights took off this morning from Glasgow and Edinburgh airports, this is the first movement of any kind at a BAA airport since midday on Thursday.

In a statement, BAA - which is owned by Spanish firm Ferrovial - said it was working with National Air Traffic Services, airlines, regulatory authorities and the government to ensure its airports were ready to reopen at short notice.

And it said that it should have enough money to cover the losses caused by the shutdown.

"BAA entered this period of flight suspensions with sufficient available funds to mitigate the closure of British air space for a considerable amount of time," the company said.

"Right now, we don't think the airports' closure will have a material impact on our regulated airports' abilities to finance their activities," it added.

British Airways have also released a statement saying it is affecting their cash flow even more, going to the lengths on Monday to ask the EU and UK government for financial compensation due to the closures.  They said that the inability to go ahead with flights is costing them as much as £20m a day.

Also on Monday, Europe's biggest travel operator, TUI Travel - the owner of Thomson and First Choice - said the disruption was costing it between £5m and £6m a day.  

Posted at 01:53PM Apr 20, 2010 by Marc Stenton in The Economy  |  Comments[0]