UK inflation set to rise

The rising cost of petrol and soaring household energy bills look set to send inflation back above the Bank of England’s target today.

Cheaper pump prices dragged inflation down to 2% in December – the first time it came in on target since June – but economists are expecting a rise to 2.1% or 2.2% for January.

It is thought that hikes in gas and electricity prices, the higher cost of petrol, and less discounting on the high street contributed to the rise, as well as more expensive air and rail fares.

The expected increase in inflation comes after three consecutive monthly falls from a peak of 2.5% in September.

Investec Securities economist David Page said further rises in inflation would delay a cut in interest rates, which have been unchanged at 4.5% since August.

Forecasting that the Consumer Prices Index will rise to 2.2% – ahead of consensus of 2.1% – Mr Page said: “We think inflation is likely to move up significantly.

“Petrol prices have increased quite sharply and gas and electricity prices have gone up again so we think inflation will be 2.2% although it may come in slightly higher than that.

“The Bank will be nervous if inflation is above target. We are pencilling in a cut in interest rates in May but if inflation continues to increase it may be pushed back.”

He said further clues on the rate of borrowing would be given tomorrow when the Bank publishes its quarterly inflation report.

HSBC economist John Butler forecast inflation to be 2.1% and said it was likely to remain above target until later in the year.

“I think it is going to to stay fairly stable over the next couple of months and then later in the year come back below the target,” he said.

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