Inflation burst dashes hope of rapid rate cuts

Hopes of a rapid string of interest-rate cuts seemed to be dashed today as soaring food and petrol prices pushed inflation higher.

The Consumer Prices Index (CPI) - the Government's official measure of inflation - nudged up from 2.1% in December to 2.2% last month.

Although the rise in inflation was not as bad as some City commentators had feared - many forecast 2.3% or 2.4% - it is now at its highest since June, and still above the 2% target.

This is a major headache for the Bank of England, which is under growing pressure to cut interest rates to boost the ailing economy. But with inflation on the rise, members of the Bank's monetary policy committee, led by Mervyn King, will be reluctant to act as quickly as many hoped.

The pound rose 0.18 cents against the dollar to 1.9518 as City traders bet rates will not move again until May or June.

James Knightley of ING said: "We are likely to see CPI push above 2.5% in the next two or three months. This will keep the Bank cautious on inflation, suggesting the gradual policy easing stance will remain in place. Nonetheless, with the growth outlook continuing to deteriorate we still see the policy rate falling to 4.5% by the year-end."

Interest rates were cut from 5.75% to 5.5% in December, and again last week to 5.25%, amid signs that the economy is heading for a sharp slowdown. But drastic cutting like that by America's Federal Reserve, which has slashed rates from 4.25% in 3% in recent weeks, is not on the cards in Britain.

Government number crunchers said the CPI rise was mainly because of dearer petrol and food. Fuel rose by 1.3p last month to 103.9p a litre - the sharpest increase since the current series of records began in 1997.

The broader measure of the cost of living, the Retail Prices Index, which includes mortgage bills, edged up from 4% to 4.1%.