Cost of living above target - and heading up

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The Independent Online

The rate of inflation increased to 2.2 per cent last month as households faced rocketing food and petrol costs, official figures revealed today.

And the recent round of energy bill hikes is set to see inflation soar next month as double-digit price rises for gas and electricity kick in.

Today's figures from the Office for National Statistics (ONS) showed that inflation remained above the Government's 2 per cent target for the fourth month in a row.

Fuel inflation rose at its highest annual rate since records began more than 11 years ago, according to the ONS. Food price inflation also leapt last month, rising to 6.1 per cent, its highest rate since June 2001.

The Consumer Prices Index (CPI) - the official measure of inflation - rose from 2.1 per cent in December, having remained unchanged since October.

While the increase was lower than expected by economists, who had pencilled in a rise to 2.3 per cent in January, inflation is set to spike in February when all of this year's energy tariff rises will be included.

The ONS said it was changing its method of calculation to reflect the trend for increases to come into effect sooner, including gas and electricity rises from the day they are introduced instead of phasing in increases over a four-month period.

Five major energy providers have so far upped energy prices, with Npower the first to introduce the rises at the beginning of last month, followed soon after by EDF, British Gas and E.ON.

Economists are forecasting the rises could push CPI above 2.5 per cent, straying further away from target and closer towards "letter-writing territory" for the Bank of England.

Bank Governor Mervyn King has to pen an open letter to the Chancellor if CPI is more than 1 per cent above or below target.

He has already warned that rising inflationary pressures this year could see him write one, or possibly more, letters of explanation.

The Bank, which had advance viewing of the January inflation figures, may have felt there was room for this month's quarter point cut in interest rates, to 5.25 per cent.

However, experts said the expected spike in CPI reinforced views that rates will only come down slowly and gradually.

James Knightley, economist at ING, said the effect of the change in energy inflation calculation "will keep the Bank cautious on inflation".

Howard Archer, chief economist at Global Insight, added: "We do not expect the Bank to cut interest rates again until May, unless it becomes clear that growth is slowing substantially.

"Further out, we still expect interest rates to fall to 4.5 per cent by the end of the year as we believe that the economy will see extended below-trend growth and that this will eventually contain inflation."

The ONS said that petrol had the largest upward pressure on inflation in January, as the average price of petrol rose by 1.3p to 103.9p per litre.

Food and non-alcoholic beverages also contributed to the rise, with grapes and grapefruit in particular seeing price increases.

Figures yesterday showed that manufacturers were battling against soaring food costs, with wheat costs pushing prices up more than 36 per cent in the past 12 months - the biggest jump in prices for more than 20 years.

However, the ONS said today that CPI benefited from a downward pressure from clothing and footwear, with price tags falling faster in this year's January sales than last year.

The headline Retail Prices Index inflation benchmark, which includes mortgage payments, increased to 4.1 per cent in January from 4 per cent in December.

This was despite the December cut in interest rates, as the inflationary pressures from food and petrol offset the effects of the quarter-point reduction.

The Bank will give a further insight into its thinking on inflation and interest rates when it publishes the quarterly inflation report tomorrow.

Policymakers have already indicated their concerns over inflation pressures, last week highlighting their struggle to balance a slowing economy with rising CPI in the statement accompanying their interest rate decision.