Inflation rises on soaring energy bills

Inflation posted its biggest monthly jump for five years in April, according to official figures yesterday that reinforced forecasts that interest rates are likely to rise.

Prices rose by 0.6 per cent between March and April, the biggest rise since May 2001, the Office for National Statistics (ONS) said.

The annual rate jumped from 1.8 per cent in March to 2 per cent, putting inflation exactly in line with the figure the Bank must target when it sets rates. The increase was driven by rises in air fares and energy bills, the ONS said. Experts believe inflation is set for further increases as fresh rises in energy prices and a broad rise in goods prices feeds through to the index over the summer.

Southern and Scottish Energy imposed rises of 16.5 per cent in gas prices and 9.4 per cent in electricity on 1 May. Any rises in petrol prices this month in the wake of soaring oil prices will be magnified by a drop in forecourt prices a year ago.

However, the measure of "core" inflation that strips out volatile elements such as energy was unchanged at 1.3 per cent.

The contrasting messages from yesterday's figures left economists in the City divided over whether the next move in borrowing costs would be up or down.

Some said the Bank's Monetary Policy Committee would become increasingly concerned that rising inflation would feed through to higher wages and, in turn, to higher prices.

"A rate rise by August looks increasingly likely," Michael Taylor, an economist at Lombard Street Research, said. Last week, the Bank signalled it was considering a rate rise by publishing forecasts showing inflation staying above 2 per cent with rates unchanged at 4.5 per cent.

But others said that as the impact of energy prices faded, it would expose the extent of deflation on the high street that was keeping core inflation low.

The financial markets have held a long-standing forecast for at least one rate rise in the coming months. The pound rose against the euro and the dollar yesterday.