Inflation steady despite higher oil prices

Britain's underlying inflation rate remained steady at 3% in March at a near-five year high, official figures showed today.

The office for national statistics said retail prices, excluding volatile home loans, rose 0.4% in March, keeping the annual rate at 3%, the highest since May 1998.

It was the fifth month in a row that underlying inflation had strayed above the Bank of England's 2.5% target. But the Bank's monetary policy committee (MPC) has expressed little alarm at the recent bounce in inflation, citing temporary factors such as the rise in petrol prices.

The main upward pressure on inflation last month came from motoring costs as petrol prices have risen in recent months in the run-up to war in Iraq. Oil prices have since come off their highs as the conflict draws to an end.

Analysts agree that the rise in inflation will pass. John Butler, economist with HSBC said: "
We have not yet seen the peak in underlying, but the MPC can probably rest a little easier given the recent drop in oil prices. We expect inflation to reach a high-point around June, as the impact of higher council taxes and lower sterling feed through, and then fall back
thereafter."

The introduction of London's congestion charge also added to upward pressure on the index while household goods prices also rose faster than they did a year earlier. There was also a small upward effect from food prices due to changes in the cost of non-seasonal food.

But the headline measure of inflation, which includes mortgages, fell to 3.1% in March from 3.2%, driven by the Bank of England's surprise February interest rate cut which pushed down the cost of mortgage loans.

Despite current levels of inflation, the Bank is more worried about signs of consumer weakness in the economy. Yesterday, a British Retail Consortium survey reported a surprising drop in retail sales in March.

According to the BRC, retail sales fell 0.6% last month March from a year ago, the weakest figure since March 2000 when sales fell 0.8%. Given the Bank's recent tendency to focus more on short-term indicators, it increases the chance of a cut in rates at the May meeting, analysts said.