UK inflation shoots above 2 pct, adding to Bank of England conundrum


UPDATE 2-UK inflation shoots above 2 pct, adding to Bank of England conundrum

* Consumer price index +2.3 pct yr/yr
    * First time CPI above BoE target since Nov 2013
    * Fuel prices rise, food turns more expensive
    * Sterling gains, government bonds fall

 (Adds Carney, manufacturing survey)
    By William Schomberg and David MillikenLONDON, March 21 (Reuters) - British inflation shot past the
Bank of England's 2 percent target last month, potentially
adding to uneasiness among some officials at the central bank
about keeping interest rates near zero.
    Consumer prices rose by a stronger-than-expected 2.3
percent, the biggest annual increase in nearly three-and-a-half
years, pushed up by an increase in global oil prices and the
impact of the Brexit vote on sterling.
    Last week, one of the BoE's policymakers voted to raise
record-low borrowing costs because of growing inflation
pressures and the economy's resilient response so far to
Britain's decision last June to leave the European Union.
    Other policymakers said they could soon follow suit,
depending on inflation and growth data.
    February's rise represented the first time in more than
three years that inflation topped the BoE's target, but Governor
Mark Carney said it was important not to overreact to a single
month's data.
    Carney has previously warned of "twists and turns" ahead for
Britain's economy as the country prepares to leave the EU, a
process Prime Minister Theresa May will start next week.
    And most BoE policymakers have noted how slowly wages are
growing, another reason to keep rates low.
    But Ruth Gregory, an economist at Capital Economics, said
the latest data would do little to reassure those BoE
rate-setters who are more concerned about higher inflation.
    "If the economy continues to hold up well as we expect,
interest rates could be rising rather sooner than the markets
have been anticipating," she said in a note to clients.
    The increase in the annual inflation rate between January,
when it stood at 1.8 percent, and February was the steepest
since October 2012, the ONS said.
    Economists taking part in a Reuters poll had expected
inflation would rise to 2.1 percent.
    Sterling hit its highest level against the U.S. dollar in
three weeks after the data. British government bond prices fell.

    While the fall in the value of the pound has pushed up
inflation, it has also given a boost to manufacturers whose
exports are more competitive in foreign markets. A recovery in
the global economy is also helping British factories.
    Optimism among British factories surged to a 22-year high in
March as exports rebounded, a survey showed. [nL9N1FL00K]
    Britain's vote to leave the EU last June caused the pound to
slide, pushing up the price of imports. Furthermore, global oil
prices have risen, adding to the squeeze on the spending power
of households.
    The BoE has said it expects inflation will peak at 2.8
percent in the second quarter of next year, but many economists
say it is likely to hit 3 percent. The BoE underestimated the
extent of inflation's rise after the global financial crisis in
2007-09 which also caused a sharp fall in sterling.
    Inflation has also accelerated in the United States and
elsewhere in Europe.
    The ONS said transport costs, which were pushed up by rising
 fuel costs, were the biggest driver of inflation in February.
    Also, food prices rose in annual terms for the first time in
more than two-and-a-half years. Excluding oil and other volatile
components such as food, core consumer price inflation rose to
2.0 percent, above the Reuters poll forecast of 1.8 percent.
    Data on factory gate prices underscored the inflationary
pressures still in the pipeline. Output prices rose 3.7 percent
in annual terms, the strongest increase since the end of 2011.
    Prices paid by factories for materials and energy surged
with the cost of crude oil, almost doubling from a year earlier.

 (Additional reporting by Andy Bruce; Writing by William
Schomberg; Editing by Larry King and Andrew Heavens)
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