UK inflation increases to 16-year high

The UK’s annual rate of inflation has reached a 16-year high of 4.7% in August, up from 4.4% the previous month.

The figure is more than double the bank’s target of 2% and has meant the Bank of England’s Governor, Mervyn King, has been forced to write a letter to Chancellor Alistair Darling explaining why.

Mr King blamed ’sharp, largely unanticipated‘ rises in energy and food costs which exceeded the target of 2%.

Mr King added that these pressures were driving up consumer prices globally, with eurozone inflation at 4% and US CPI at 5.6%.

According to the Office for National Statistics (ONS), consumer prices rose 0.6% during the month due to higher energy and food bills.

Inflation as measured by the Retail Prices Index (RPI), often used in pay negotiations, dropped to 4.8% from 5%.

However, many analysts believe that inflation may have reached its peak as the price of oil fell below $100 a barrel this week, following highs of $147.

Richard Hunter, an analyst at stockbrokers Hargreaves Lansdown, said the latest inflation figure, together with the recent moves in energy prices, could be a sign that inflation has reached a high.

This could result in a loosening of monetary policy by way of a cut in interest rates, added Mr Hunter.

Earlier this month, the Bank of England’s Monetary Policy Committee opted to retain interest rates at 5%. Rates have been on hold since April.

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