Inflation set to hit 2% for first time since 1998

Inflation could breach the Government's target for the first time in seven years as soon as next month, it emerged yesterday.

Inflation could breach the Government's target for the first time in seven years as soon as next month, it emerged yesterday.

The measure the Bank of England targets was unchanged at 1.9 per cent, its highest level since 1998 but below the 2.0 per cent target, the Office for National Statistics said.

The headline rate commonly used by pay negotiators was unchanged at 3.2 per cent while the rate the Bank used to target fell to 2.3 per cent from 2.4.

A record surge in water and sewerage costs and rises in banking services and restaurant meals were offset by lower prices for food, furniture and air travel, the ONS said.

Its outlook for inflation in May pointed to rises in prices of food, clothes and shoes, furniture, household equipment and air fares. It did not highlight any falls.

Last week the Bank of England forecast inflation rising above 2.0 per cent in the coming months but hinted that would not force it to raise rates as it expected it to be a short-term blip.

Analysts said this meant the Bank would be prepared to cut rates to head off the impact of weakening growth even if inflation broke through 2.0 per cent.

Michael Saunders, the UK economist at Citigroup, said: "The 2.0 per cent target is precisely that - a target not a ceiling. The Bank can cut rates even if inflation is above that but only if it is sure the inflation overshoot is transitory."

There was a further rise in goods inflation to a six-year high although at an annual rate of 0.2 per cent it is showing no signs of threatening the target. Services inflation was unchanged at two-year high of 4.0 per cent.

Alan Castle, the UK economist at Lehman Brothers, said: "The report has a marginally hawkish element to the extent that the components which surprised on the upside constitute 'true' core inflationary pressures."

Mervyn King, the Governor of the Bank, said last night it would not hesitate to act to combat rising inflation and would not repeat the mistakes of the past when it failed to act when prices drifted up. He said it was "comforting" that inflation expectations had stayed close to the target.

"Many of the problems of the past resulted from the failure to take action before expectations had started to drift upwards, and the cost of that inaction proved to be high," Mr King said.

Risers and fallers

UP

A Household services rose at a record annual rate of 6.5%, due mainly to a 13.5% surge in water bills.

A Rising prices of drinks in restaurants and hotels after the Budget in March were blamed for a rise in catering costs.

A Charges for bank overdrafts and current accounts rose, taking "other" financial services inflation up 2%.

DOWN

Furniture prices dropped by 4.1 per cent in April after a record increase of 6.3 per cent in March.

Prices of food, especially cauliflowers, lettuces and cucumbers, fell as supplies improved after earlier shortages.

Air fares fell, particularly for long-haul and domestic trips. This was magnified by the timing of Easter this year, which fell in April a year ago.