UK inflation near seven-year high

Inflation unexpectedly accelerated last month to a near seven-year high, keeping alive speculation that interest rates would rise again.

The figures, coming just ahead of a May 5 general election, could prove awkward for the Labour Party, which is fighting on its economic record including low inflation.

But analysts cautioned that the 1.9 per cent annual inflation rate reported yesterday could ease in April given that part of the rise was explained by the fact the Easter holidays came earlier this year.

The figure, boosted by sharp rises in airfares and petrol prices, was the fastest annual growth in the consumer price index since May 1998 and just below the Bank of England's two per cent target.

Analysts were expecting a rise to 1.7 per cent from 1.6 per cent in February.

Financial markets reacted strongly, with the pound rising and interest rate futures factoring in greater chances of a quarter point hike in base rates to five per cent later this year although few expect rates to climb next month.

Some analysts are still unsure whether the price rises will linger given weakness on the High Street in recent months and disappointing results from many retailers.

"Looking ahead, with the Easter effects dropping out next month and oil prices down, April inflation should soften. But the big question is will retailers make the price increases stick this time," said John Butler, UK economist at HSBC.

"Our view is still that the next move in UK rates is up."

Record oil prices in March, which have since receded, appeared to have pushed up inflation again as bigger rises in petrol and diesel prices also contributed to higher inflation.

Airfares, which tend to climb over holiday periods, rose more this March than a year ago which coincided with an earlier Easter holiday.

The CPI was also pushed up by furniture prices where recoveries were stronger than a year ago. Clothing and footwear prices rose in March this year but were flat a year ago, and so contributed to the rise in inflation.

The Monetary Policy Committee's latest set of Inflation Report forecasts made in February did not predict a rise to 1.9 per cent until the second quarter of 2006.

The average inflation rate for the first quarter, at 1.7 per cent, is also above the 1.5 per cent pencilled in by policymakers.

Economists said that despite a weaker tone to recent data - including softer figures for trading partners like the United States and the eurozone - the climb in inflation would make life tougher for policymakers in coming months. "The MPC have been arguing that inflation risks lie to the downside of their forecast. But, in practice, the outturns are coming through on the upside," said Michael Saunders at Citigroup.

Mr Blair sought to play down the rise in CPI at an election campaign news conference, saying: "We have got low levels of inflation by historic standards."

The BoE has identified unexpected weakness in household spending as the key risk to an otherwise upbeat outlook for the world's fourth largest economy. The ONS will publish its latest set of retail sales data tomorrow.

Growth in the retail price index (RPI), on which most pay deals are based, held steady at 3.2 per cent last month, the ONS said, capped by a slowing housing market and only slightly above forecasts of 3.1 per cent.

A separate report released overnight by the Royal Institution of Chartered Surveyors showed that falls in house prices accelerated in the three months to March with sales volumes stagnating at levels about a third below a year ago.

RPIX, the BoE's old target measure, climbed to 2.4 per cent in March from 2.1 per cent in February.