Inflation in Britain held at a 2.5 year high in May as rising food prices balanced a drop in travel costs, providing little comfort for the Bank of England which expects inflation to hit 5 per cent later this year.
The Office for National Statistics said consumer prices rose 0.2 per cent last month, keeping the annual inflation rate at 4.5 per cent, as forecast.
There was little market reaction as investors stuck to their bets that a weak economic outlook would keep UK interest rates at a record low 0.5 per cent until the end of the year, following a run of recent soft data with harsh government spending cuts only now beginning to bite.
Money markets are not fully pricing in a rise in UK rates until May 2012.
Even Britain's biggest retailers are beginning to feel the pinch with Tesco missing forecasts with a second consecutive quarterly fall in underlying sales in its main British market as shoppers cut back on discretionary spending.
Finance director Laurie McIlwee declined to comment on whether Britain's government was cutting spending too quickly but told reporters the biggest challenges facing shoppers were higher prices for fuel and utility bills.
Today's steady inflation reading follows an unexpectedly strong jump in April, when travel providers and airlines ramped up prices in the run-up to Easter and the extra holiday for Britain's Royal Wedding.
Core inflation dropped to 3.3 per cent from April's record high of 3.7 per cent, also reflecting lower transport costs, particularly air fares.
BoE governor Mervyn King has said repeatedly that the factors behind soaring prices are likely to be temporary, and warned last month that attempts to bring inflation down quickly would harm the economy.
However, fellow rate-setter Martin Weale reiterated yesterday his call for an immediate interest rate rise, arguing the BoE should not wait until a wage-price spiral develops.
Utility companies have announced further price rises for heating and energy and Weale said commodity prices were unlikely to fall.
The retail price inflation gauge, which includes more housing costs and is the benchmark for many wage deals also held steady at 5.2 per cent, as expected.
Inflation has been above the Bank of England's 2 per cent target for 1.5 years and the Bank said in its inflation report that the annual rate may hit five percent later this year.
