More rate rises likely as inflation climbs to 1.4%

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Inflation rose last month, according to official figures yesterday that analysts said justified the Bank of England's decision to raise interest rates a fortnight ago and made further rises more likely.

The consumer price index, which the Bank of England targets, rose to 1.4 per cent in February from 1.3 per cent. The headline rate, which is a better measure of the cost of living, fell from 2.8 to 2.6 per cent because of a slowdown in house prices which are excluded from CPI. The Office for National Statistics said the rise was driven by higher banking charges and less generous price discounts on clothes in the January sales.

It was the first acceleration in inflation for six months but leaves the CPI well below the Government's target of 2.0 per cent. It was the 68th consecutive month that CPI inflation had stayed below the target.

Analysts said it supported the Bank's projections in last week's quarterly inflation report that CPI would rise towards, and break though, the target in two years. This was the reason the Bank's Monetary Policy Committee gave early this month, when it raised interest rates by a quarter percentage point for the second time in three months.

"Today's data do not diminish in a material way the prospects for a further tightening in monetary policy as the year progresses," Simon Rubinsohn, the chief economist at Gerrard stock brokers, said. "The key issue for the MPC is not the current rate of inflation but the likelihood that, with growth running ahead of trend, spare capacity in the economy will be exhausted over the next couple of years."

The ONS said the main upward influence on the CPI came from bank overdraft charges, which were cut in January 2003 but were unchanged last month. Clothes prices were cut by just over 3 per cent in the January sales - the meanest post-Christmas discounting since 1990, the ONS added. January sales peaked in 2000 when retailers slashed prices by more than 5 per cent.

The biggest downward influence came from subscription fees for satellite television and rental charges for television and video. Although the ONS said new clothing stock was coming in at higher prices, overall goods prices in January were unchanged from a year earlier, just as they had been in December. Services inflation, meanwhile, rose sharply to an annual rate of 3.1 per cent last month from 2.8 per cent in December.

The financial markets are now waiting for the minutes of the MPC meeting that sanctioned the February rate rise published today along with a speech by Rachel Lomax, one of the Bank's two deputy governors.