Inflation hike raises alarm over bank rate rises

INFLATION CLIMBED above its 2.5 per cent target last month for the first time since August. The figures sent a ripple of panic through industry and unions, for fear that they would persuade the Bank of England not to cut interest rates again.

The underlying rate of inflation edged up to 2.6 per cent in December. Price increases on the high street before Christmas were partly to blame, and so were bigger than normal increases in the price of potatoes and other seasonal foods.

Despite the unexpected increase in target inflation, John Monks, general secretary of the Trades Union Congress, immediately called for a 1 per cent reduction in interest rates. "The Bank should not be deflected from its top priority of restoring industrial confidence," he said.

Ian Peters, deputy director of the British Chambers of Commerce, said: "Our surveys show members fail to see any significant inflationary pressures. We will look to the Bank to reduce rates ultimately towards the European level." The Engineering Employers' Federation, reporting a slowdown in pay settlements in the industry in December, agreed.

Separately, a survey yesterday showed a small improvement in consumer confidence this month, although it often picks up after Christmas. Figures for gross domestic product (GDP) in the final quarter of 1998, due on Friday, will be a key influence on the Bank's next decision. Analysts in the City stuck with their view that homebuyers will enjoy further rate reductions, perhaps as early as next month but more likely after a short pause.

The rise in inflation couldprove temporary, as in recent years there have been price rises in December followed by bigger cuts in the January sales.