Inflation hits seven-year high

An unexpected surge in inflation has led economists to predict that interest rates could be set to rise soon.

17:27 19 April 2005

An unexpected surge in inflation has led economists to predict that interest rates could be set to rise soon.

The Bank of England raises and lowers interest rates in an attempt to keep inflation as close to its two per cent target as possible.

And today the Office for National Statistics (ONS) revealed that inflation jumped from 1.6 per cent in February to 1.9 per cent in March, the highest rate in seven years.

Members of the bank's interest rate setting monetary policy committee (MPC) had previously predicted that inflation would rise above the two per cent target - but not until next year.

The news that inflation has now risen to 1.9 per cent heavily increases the chance that the MPC will hike interest rates at its next meeting on May 9th.

"This is a nasty surprise for the Bank of England that significantly increases the chances of an interest rate hike in May," said financial consultants Global Insight's chief economist Howard Archer.

He added: "Inflation has risen from 1.1 per cent last September and is now almost up to the Bank of England's medium-term target of 2.0 per cent.

"Furthermore, there are still significant underlying inflationary pressures stemming from high oil prices, the lack of an output gap and the tight labour market. Consequently, we expect the bank to raise interest rates by 0.25 per cent next month."

The rise in CPI inflation was principally driven by increases in transport costs, the ONS said. This was partly due to the early Easter holiday period making air fares relatively higher than in the same calendar month last year.

The cost of food and non-alcoholic beverages, furniture and clothing also went up.