Inflation leap sparks rate fears

A SURGE in the price of petrol and air fares pushed inflation to its highest level for seven years, raising fears that interest rates could go up soon.

Figures from the Office of National Statistics showed the Consumer Prices Index leapt to 1.9% in March, after remaining steady at 1.6% for the previous three months. The rate is now only a whisker from the Bank of England's target of 2%.

Analysts had been expecting the rate to step up to 1.7%, but more expensive food, furniture and clothing forced prices higher. The figure is at its highest since May 1998, when inflation was 2.1%. Inflation has increased from a low of just 1.1% in September last year.

The month was also affected by Easter, which fell in April last year, with airlines taking advantage of the increase in demand to bump up prices. Carriers were also forced to increase fares due to the high price of oil. The unstable global oil market also helped pushed prices at the petrol pump to record levels.

The increase takes the CPI closer to the Bank of England's 2% target. The Bank's aim is to use rates to keep inflation below 2% two years ahead.The data will therefore increase chances of a rate rise The Bank has held rates at 4.75% but analysts expect an increase se to 5%, possibly as early as next month.

Howard Archer, UK economist at research firm Global Insight, said: 'This is a nasty surprise for the Bank of England that significantly increases the chances of an interest rate hike in May. While much of the increase was due to higher energy and seasonal food prices, there was evidence that retailers were starting to push through stronger prices in other sectors.'

Economist Simon Rubinsohn at Gerard expects the Bank to wait for more consumer related data before deciding on rate movements. He said the CPI was still below the Bank's 2% target and it is unlikely rates will move in May.

Investec chief economist Philip Shaw said the CPI figure was 'very disappointing', adding the rise could not be blamed on just one inflationary pressure. It came from across the board, including food, clothing, furniture as well as petrol and air fares,' he said.