Shock for Bank as inflation rises

Food, clothes and fuel push up the cost of living as prices rise 3.5 per cent

The Bank of England's forecasts for a sharp fall in inflation this year were dealt a serious blow yesterday as official figures showed it actually rose in March for the first time in six months.

The consumer prices index rose to 3.5 per cent from February's 3.4 per cent, moving further away from the central bank's 2 per cent target thanks to the rising cost of essentials including bread, fruit and clothes.

Economists said this reversal of the downward trend cast doubt on the Bank's forecast that inflation would fall below its target by the end of this year. Barclays Capital now reckons that prediction is almost a whole percentage point out.

This poses a dilemma for the Bank: the economy remains weak and arguably in need of more stimulus, but if inflation is back on the climb, it is hard to justify pumping in more money through quantitative easing. Hawks on the Bank's monetary policy committee including its chief economist, Spencer Dale, and Martin Weale are already warning about price rises following the £325 billion of QE currently in operation.

Alan Clarke, an economist at Scotiabank, said: "We're clearly not growing fast enough, but uncomfortably high inflation is a significant obstruction to more QE. It's not going to be an easy decision for the Bank of England at its next meeting in May."

The MPC member Adam Posen, an advocate of more stimulus for the economy, said the Bank would not change its views on the strength of just one month's data, but he added: "If the core inflation rate doesn't come down on a sustained basis, then we have got to rethink." Minutes from the MPC's April meeting due today would show its concerns about inflation, he said.

Some economists argued that March's figures would prove to be a statistical anomaly caused by an unusual fall in food prices a year earlier. Others warned of further price pressures.

Andrew Goodwin, a senior economic adviser to the Ernst & Young Item Club, said: "Higher oil prices are clearly having an impact and, with retail petrol prices climbing recently, inflation is likely to remain high in April too."

Many supermarket staples rose last month. Prices for fruit and for bread and cereals were both up 0.2 per cent on the month, while meat prices rose 0.8 per cent.

The TUC general secretary, Brendan Barber, said wages had been falling since mid-2010 and urged ministers to "do everything they possibly can to get more money into people's pockets".

The International Monetary Fund, meanwhile, said the Bank still had room for further QE despite inflation concerns. IMF economists also lifted their 2012 growth forecast by a fraction to 0.8 per cent. First-quarter growth figures next week will show whether Britain avoided a technical "double dip" recession.