Oil prices look set to drive up inflation and interest rates

Soaring oil prices look set to deliver a sharp increase in inflation, as official figures yesterday revealed the first acceleration in living costs for four months.

Soaring oil prices look set to deliver a sharp increase in inflation, as official figures yesterday revealed the first acceleration in living costs for four months.

The rise of 3p a litre imposed by garages this month, combined with a similar cut a year ago, could add as much as 0.2 percentage points to inflation in May's figures, analysts said.

They said climbing world oil prices supported the Bank of England's forecasts that inflation would overshoot its target, leading to higher interest rates.

City economists are now waiting for the publication today of the minutes of the meeting of the Bank's Monetary Policy Committee to see if there were calls for a half-point rate rise a fortnight ago. Higher petrol and heating fuel costs pushed the annual rate of inflation that the Bank of England targets to 1.2 per cent last month from March's 1.1 per cent, the Office for National Statistics said.

The increase was less than the City has expected and was still well below the Bank's 2.0 per cent target but economists said it contained clear signs that inflation has troughed.

The ONS said increases in the cost of petrol and domestic heating oil were the biggest factors behind April's inflation rate. That led to the largest jump in the cost of household utilities and services since June 2001.

The ONS said there was a large upward effect from the rise in petrol prices. Oil prices, which hit an all-time high of $41.85 a barrel on Monday, fell to $40.54 in New York yesterday.

The issue of rising oil prices, which could trigger higher interest rates and stall the economic recovery, will be on the agenda when the Group of Seven finance ministers meet this weekend. Wolfgang Clement, the German economy minister, said yesterday the high oil price was "very dangerous".

But Anne Krueger, the acting managing director of the International Monetary Fund, said there was no immediate threat to the world economy from oil costs. "It is one of those things that we see as something to keep an eye on rather than something that we think is definitely in the danger area," she said at a World Trade Organisation meeting.

In Britain, high petrol prices have triggered speculation of a repeat of the fuel protests four years ago. Patricia Hewitt, the Trade and Industry Secretary, urged motoring groups yesterday to take a "long-term view".

"The real cost of motoring has been falling for a number of years, we have abolished the fuel duty escalator and we have not had a real increase for quite some years," she said.

City analysts said rising petrol costs would fuel calls from within the MPC for further rate rises.