BC-BRITAIN-INFLATION/ (UPDATE 2)

UPDATE 2-UK inflation jumps to 17-month high in April

April CPI +3.7 percent y/y; forecast was +3.5 percent

April RPI +5.3 percent y/y, highest since 1991

Alcohol, tobacco tax rises, food and clothing drive jump

BoE's King expects temporary price spike to wane over year

Sterling dips; analysts mixed on impact for interest rates

(Adds King, Osborne letters)

By David Milliken and Matt Falloon

LONDON, May 18 (Reuters) - British consumer price inflation unexpectedly jumped to a 17-month high in April, driven by big rises in tax on alcohol and tobacco as well as higher prices for women's clothing and food, data showed on Tuesday.

Sterling briefly rose against the dollar after the data before slipping back, reflecting concerns that potential earlier than expected interest rate hikes prompted by price pressures, added to imminent budget cuts, might derail the economy's recovery.

BoE Governor Mervyn King said temporary factors were largely to blame for the high numbers and that inflation was likely to ease back to Britain's official 2 percent target within a year, though the pace and extent of that expected fall were "highly uncertain".

Annual consumer price inflation rose to 3.7 percent last month, up from 3.4 percent in March, while the longer-running retail price inflation series hit its highest level in more than 18 years, the Office for National Statistics said.

Economists had forecast a smaller increase in CPI to 3.5 percent.

"April's UK consumer prices will fuel fears that (BoE rate-setters) might have to raise interest rates to quash price pressures just when the fiscal squeeze is about to hit the economy too," said Capital Economics analyst Jonathan Loynes.

The strong reading meant King was required to write a public letter to new Conservative finance minister George Osborne to explain why inflation was still more than a percentage point above the government's 2 percent target.

King said higher oil prices, a rise in value-added tax to 17.5 percent from 15 percent at the start of the year, and past falls in sterling were driving prices higher, but were only short-term factors that would abate over the coming months.

"The temporary effects of these factors are masking the downward pressure on inflation from the substantial margin of spare capacity in the economy," he said.

STUBBORN INFLATION

Gilt futures dropped more than 30 ticks on the inflation news before recovering slightly but continuing to underperform Bunds.

"The basic point is that it's bad news for the Bank of England in its story of inflation coming down," said Brian Hilliard, economist at Societe Generale.

Just last week the central bank said it expected higher inflation to be transitory, as one-off effects are gradually outweighed by weak growth and high unemployment, which limit the ability of firms and workers to raise prices and wages.

The central bank forecasts that CPI should be back on target by the end of the year or early 2011, and most economists had not expected interest rates to rise from their record low 0.5 percent until then.

Some of the boost in inflation last month is due to one-off effects. Britain's annual budget fell a month earlier in 2010 than in 2009, bringing forward annual rises in tax on alcohol and tobacco, which accounted for a third of the increase in the annual rate of CPI between March and April.

But higher prices for food and for clothing and footwear also contributed a similar amount to the increase in the CPI rate from March to April.

"The thing that stands out to me is the rise in clothing," said Alan Clarke, economist at BNP Paribas. "There's no getting away from the fact that inflation keeps on surprising on the upside."

On the month, consumer prices rose by 0.6 percent.

The retail price inflation gauge rose to 5.3 percent from 4.4 percent, versus forecasts for a rise to 4.9 percent, the highest since July 1991. That was largely driven by base effects after the sharp fall in mortgage interest rates in 2009 was not repeated in 2010.

RPI includes more housing costs than CPI, which matches the European Union Harmonised Index of Consumer Prices (HICP), and is used to index many social security payments and some wages.

(Editing by John Stonestreet; editing by John Stonestreet)

REUTERS