Leap in inflation triggers fears of May rate increase

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The Independent Online

A surge in airfares and petrol prices pushed inflation to a seven-year high last month, putting a May increase in interest rates firmly back on the agenda, analysts said.

A surge in airfares and petrol prices pushed inflation to a seven-year high last month, putting a May increase in interest rates firmly back on the agenda, analysts said.

The Consumer Prices Index - the measure the Bank of England uses to set rates - jumped to 1.9 per cent from 1.6 per cent in February, and above forecasts of a 1.7 per cent increase, the Office for National Statistics said. It was the biggest rise since May 1998 and puts inflation a fraction below the Government's 2.0 per cent target.

Inflation has increased by 0.8 percentage points over the past six months alone. Sterling hit a one-month high against the dollar and approached a seven-month peak against the euro as traders priced in an imminent rate rise.

The largest upward impact came from air passenger transport fares, petrol and diesel prices and second cars. Food, furniture and clothing and footwear prices added to upward pressure.

Analysts said that while some of the rise could be explained by oil prices or, in the case of airfares, the timing of Easter, analysts said there were signs of an across-the-board rise in prices. Ben Broadbent, at Goldman Sachs, said: "The orthodox argument for monetary policy is that rate-setters should see through these 'first-round' effects, and react only to 'second-round' effects on other prices. Even so, the data are significant."

Howard Archer, at Global Insight, said he expected inflationary pressures from oil prices, the lack of an output gap and a tight labour market would justify a rate rise on 9 May. "This is a nasty shock for the Bank," he said. But David Page, at Investec, said much of the increase could be explained by the impact of a rise in airfares for Easter being magnified by a fall last year, when the bank holiday weekend was later.

"The Bank should not tighten policy in response to energy price inflation," he said. "The gloomier outlook for the global and domestic economy should be enough to keep interest rates on hold."

The Retail Price Index, which takes account of mortgage interest repayments, remained steady at 3.2 per cent in March, the ONS figures showed.

The rise in the pound was accentuated by poor economic news in the US. Housing starts fell 17.6 per cent in March,the steepest drop in more than 14 years.

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