Rate rise looms as inflation hits nine-year high

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The Independent Online

The sharpest increase in gas and electricity bills for a generation pushed inflation last month to its highest level since 1997, according to official figures that put the City on alert for a rise in interest rates next month.

The inflation rate that the Bank of England targets (the CPI) jumped to 2.5 per cent from 2.2 per cent in May - the equal highest since the series began. The headline rate of RPI inflation, which includes mortgage interest payments, rose from 3 per cent to 3.3 per cent.

Ed Balls, the Economic Secretary to the Treasury, in effect gave a green light from the Government to a rate rise, saying the Bank should be "vigilant".

"At this time of global uncertainty, it is important that policymakers remain vigilant to the risks and forward looking in their approach," he said. "Today's inflation data confirm the need for such vigilance in the face of such risks."

The Office for National Statistics said housing, water, electricity, gas and other fuels rose at a record annual rate of 9.8 per cent in June. Within that, gas bills rose 35.8 per cent, the highest since records began in 1962, while electricity tariffs rose 24.7 per cent, the highest since May 1981 when the Iran hostage crisis triggered fears of an Opec oil embargo.

The ONS inflation could go higher still as pre-announced increases in household bills take effect in the coming months.

Analysts said soaring household utility bills had left the Bank's Monetary Policy Committee with a dilemma over whether to see them as driving inflationary pressure or as a drag on consumer spending.

Royal Bank of Scotland said it had changed its view and said a rate rise now rather than later was warranted. Geoffrey Dicks, its chief UK economist, said: "The MPC's May forecast effectively gave it an option to raise rates [and] we think it will exercise that option in August."

The average petrol price hit 97.5p a litre on Monday, up from 97.3p on Saturday and an increase of 9p since the start of the year.