Gilts investors on tenterhooks over imminent inflation data

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Beleaguered investors in gilts once again face a torrid time if a slew of inflation numbers published this week show that prices in Britain are increasing faster than expected.

Gilt yields soared last week in the wake of the pre-Budget report, amid concerns that Britain's credit rating could be downgraded. And on Friday the cost of raw materials and other inputs for British firms increased at the quickest pace in a year in November, in part fuelled by higher oil prices.

On Wednesday the Office for National Statistics (ONS) publishes key headline inflation measures – the Consumer Prices Index and the Retail Prices Index. Last month, the CPI accelerated for the first time in eight months, reaching 1.5 per cent as demand for expensive second-hand cars fuelled a record monthly price increase. But RPI, which includes mortgage payments, continued to show that British prices were falling at a rate of 0.8 per cent.

On Thursday the Bank of England also publishes its Quarterly Inflation Attitudes Survey. Earlier in the year the Bank's Governor, Mervyn King, warned that inflation would spike in the first few months of 2010, in part due to the increase in VAT, which will revert back to 17.5 per cent after the one year 2.5 per cent reduction.