UK inflation reached the highest since at least 1997 in May, and Bank of England Governor Mervyn King predicted it will exceed 4 percent later this year, adding to speculation that the economy will fall into a recession.

The Monetary Policy Committee "is concerned about the present and prospective period of above-target inflation," King wrote in a letter to the government, after the Office for National Statistics said consumer prices climbed 3.3 percent from a year earlier last month. "The path of bank rate that will be necessary to meet the 2-percent target is uncertain."

The pound fell after the inflation data, which fueled speculation that rising prices will curb growth and push the economy closer to a recession. The Labour government decreed in 1997 when it came to power that the central bank governor must write to explain if inflation strays more than a point from the target, which has only happened once before.

Policy makers "are going to sit on their hands for the time being since there's not really much they can do for the moment," said George Buckley, chief UK economist at Deutsche Bank AG in London. "They need to see what the economy does first."

The pound dropped against the US dollar and the euro. The currency fell as much as 0.8 percent to US$1.9506 as of 12pm in London. Against the euro, it dropped 0.8 percent and traded at 79.46 pence. The yield on two-year government bonds also fell 18 basis points to 5.339 percent.

The inflation rate reached the highest since the index began 11 years ago, the statistics office said yesterday in London. Economists predicted 3.2 percent, according to the median of 39 forecasts in a Bloomberg News survey.

Inflation "is likely to remain markedly above the target until well into 2009," King said in the letter, released by the central bank yesterday in London. "The committee will maintain price stability by ensuring that the rise in inflation is temporary."

Chancellor of the Exchequer Alistair Darling replied that "the government will continue to support the Monetary Policy Committee in the forward-looking decisions it takes."

Accelerating inflation may add to dissatisfaction among voters at a time when support for Prime Minister Gordon Brown's Labour Party is at the lowest since polling began in 1943, a YouGov Plc survey released on May 30 showed. Seventy-three percent of respondents predicted their financial situation will worsen in the next year, the poll showed.