U.K. Inflation fuelled by energy costs.

The U.K. inflation rate has risen to a seven-month high last month, which has limited the power of policy makers’ to lower interest rates in order to counter the current slowdown in the economy.

The Bank of England had cut the benchmark interest rate by a quarter point last week to 5.25 percent, although consumer prices have risen by 2.3 from last year. The threat of spiraling consumer prices are growing in the current climate of uncertainty.

Nick Kounis, an economist at Fortis Bank states that: “the risk is that high inflation rates keep expectations high, making it more difficult for the Bank of England to bring the rate down to target” so It is likely that there may be two more interest rate cuts during the year,

Following the sub-prime property slump the next challenge to the UK economy and its delicate inflation balance comes in the form of energy costs.

With oil prices reaching $100 a barrel last month, energy providers will undoubtedly relay the higher production costs directly to consumers utility bills.

Provider E.ON estimate that electricity prices by rise by 9.7 percent and gas costs by 15 percent.

The cost of food and raw materials are also on the rise as government data release today show factories prices has risen by 5.1 percent which marks a seventeen year high.

The balance between inflation and growth is currently extremely delicate and any policy intervention will have to be carefully considered.

This fear is voiced by Michael Saunders, chief western European economist at Citigroup who said that policy makers would not want too swiftly in dealing with the current problems, as doing so quickly could “stop the economy slowing in 2008 and produce a boom in 2009, because this would probably validate and extend the jump in inflation.”

Story link: U.K. Inflation fuelled by energy costs.