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The Globe and Mail

Inflation uptick creates Bank of England headache

Customers shop for groceries in a supermarket in London October 18, 2011. Inflation in Britain hit a three-year high in September driven by soaring gas and electricity bills, further eroding living standards and piling more pressure on the government to help struggling consumers.

STRINGER/UK/Reuters

Inflation ticked up in March, driven by higher food and clothing prices and adding to views the Bank of England will shy away from giving the struggling economy another cash-boost next month.

The central bank and the government had been hoping that falling price pressures would ease the squeeze on Britons' budgets and boost consumer spending, but the renewed rise in inflation could threaten the fragile economic recovery.

The Office for National Statistics said that consumer price inflation rose to 3.5 percent in March from 3.4 percent in February, calling a halt to a five-month run of declines from a peak of 5.2 percent in September 2011.

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The uptick in inflation may cause a headache to policy makers, who, while keen to support the feeble economy, are starting to worry that price pressures are not easing as fast as they had hoped.

The figures will make the more hawkish policy makers such as chief economist Spencer Dale and external member Martin Weale, even more reluctant to sanction another round of asset-buying when the current 325 billion pound quantitative-easing program is complete in May.

"In the context of the Bank of England, we are not growing and certainly not growing fast enough, and that argues for more QE," said Scotiabank economist Alan Clarke. "But uncomfortably high inflation is a significant obstruction. So it is not going to be an easy decision for the Bank of England in May."

Britain's economy shrank at the end of last year, and while business surveys indicated a firmer start to 2012, a drop in manufacturing and weak construction output have raised fears that the economy has fallen back into recession.

The BoE's quarterly forecasts in February showed it expected inflation to fall below its 2 percent target towards the end of this year and remain below the goal over the coming 2 years.

The ONS said the biggest upward drivers of inflation last month were food and clothing prices. Food prices fell less on the month in March than they did a year ago, driving up the annual rate to 4.6 percent, which was the highest since October 2011.

Annual clothing inflation, meanwhile, picked up a whole percentage point to 3.2 percent, also its highest since last October.

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More worryingly for the BoE, core consumer price inflation - which strips out the volatile food, energy, tobacco and alcohol components - ticked up a notch to 2.5 percent.

Retail price inflation, which is often used as a benchmark for pay deals, inched lower, however, to 3.6 percent, its lowest since December 2009.

A drought across most of England risks pushing up fresh food prices even further, while petrol prices remain near a record high.

Tuesday's data came after figures at the end of last week showed factory gate inflation was higher than expected in March, though firms' raw material costs rose at their weakest pace in more than two years.

Separate figures published by the ONS showed UK house prices rose 0.2 percent in February, taking the annual rate to 0.3 percent. The average price of a home stood at 224,473 pounds.

The ONS said the annual increase was driven by rises in London and the South East. Prices for first-time home buyers were 1.3 percent higher on average than a year ago.

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