UK inflation rose more than expected in Feb

Consumer prices in Britain rose more than expected in February, strengthening speculation over interest rate hike by the Bank of England (BoE).

The annual consumer price index (CPI) in the UK rose to 4.4 percent in February compared with 4 percent in the previous month, the Office for National Statistics said on Tuesday.

Markets had expected the CPI in January to rise to 4.2 percent.

The Core CPI, which excludes volatile crude oil prices, also increased to 3.4 percent in February against the analysts’ expectations of increase to 3.2 percent.

“The jump in the core rate from 3.0 percent to 3.4 percent was no doubt partly caused by bigger VAT (Value added tax) effects than last year, which should be temporary. But it won’t ease the growing concerns of the hawks on the MPC that the spare capacity in the economy is simply not having the disinflationary effects that the Committee had anticipated. The Budget will have to be pretty tight to keep interest rates on hold,” said Jonathan Loynes, an economist with Capital Economics.

The UK government increased VAT from 17.5 percent to 20 percent effective from January 2011.

The increase in February’s CPI was largely led by a 3.6 percent rise in prices of clothing and footwear.

UK inflation rate in February remained above the central bank’s target of 2 percent for a fifteen consecutive month. The rise in inflation increases pressure on BoE to raise the interest rates to tame the accelerating inflation.

Analysts’ expect the BoE to raise the interest rates from record low of 0.5 percent as early as May.

UK's sterling climbed to 14-month high against the greenback following the release of UK CPI data for February. The sterling climbed to $1.6377, the highest since January 2010.

Inflation is forecast to remain stubbornly high during this year as a result of increase in VAT and pressure from rising energy and commodity prices, according to the Confederation of British Industry (CBI).

Consumer price index (CPI) inflation will exceed the BoE target of 2 percent in 2011 for a second year running, it said.