Surprise jump in inflation raises the spectre of further rate increase

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The Independent Online

An unexpected jump in inflation last month has put the prospect of another rise in interest rates back on the table, analysts said yesterday.

An unexpected jump in inflation last month has put the prospect of another rise in interest rates back on the table, analysts said yesterday.

Official figures showed the annual inflation rate the Bank of England targets rose to a six-month high of 1.6 per cent, confounding forecasts of a fall but still below the 2 per cent target.

The wider cost-of-living index, which includes housing and will be used as a bargaining tool for pay settlements this month, hit a six-and-a-half year peak of 3.5 per cent.

Ross Walker, a UK economist at Royal Bank of Scotland, said: "This will feed through into higher wage settlements and in turn boost CPI inflation further down the line. These data reinforce the sense that inflation is on an upward trajectory, casting serious doubt on expectations for a near-term cut in base rates."

On the financial markets the pound reversed its falls against the euro and dollar as traders hedged their bets on the next move in rates.

The breakdown of the data showed a general upward drift in prices in December, despite speculation that retailers were forced to cut prices to tempt shoppers into their stores.

The largest rise was in furniture, furnishings and carpet prices, which surged 6.0 per cent between November and December. The rise pushed annual inflation for the wider household goods category into positive territory - at 0.7 per cent - for the first time in six months.

Price rises for recreational items such as computer games also propped up inflation, the Office for National Statistics said. The rises in gas and electricity bills, announced over the autumn, continued to feed into the inflation. Inflation in the ONS's wider housing and utilities category hit 5.4 per cent, its fastest pace since records began in 1997.

While clothing and footwear nudged down further to minus 5.2 from minus 5.0 per cent, inflation in the "other goods" category - a measure of underlying goods prices - rose from minus 2.6 to minus 2.0 per cent.

Analysts said the surprising lift in goods inflation was probably temporary and would be wound back in January's inflation data. Paul Dales, at Capital Economics, said that since yesterday's figures were collected on 14 December, the City would have to wait to gauge the scale of Christmas price discounting.

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