Inflation back up to 2% target

Higher air fares and soaring energy bills pushed Britain's inflation rate back up to the Bank of England's 2% target, official figures showed today.

The consumer prices index (CPI) rate of inflation rose from 1.8% in March to 2% in April, the Office for National Statistics (ONS) reported.

Today's figures will reinforce expectations that the Bank's next adjustment to interest rates will be upwards, although the timing of a rise is very much open to question.

The announcement of an inflation rise was widely predicted. In its May inflation report, the Bank's central projection is for inflation to rise in the short term, reflecting higher energy and import costs. But the Bank thinks CPI inflation will fall back to around the 2% target as energy prices come down.

"Overall, this is not too worrisome a report for the Bank of England, and we believe that interest rates are unlikely to rise until 2007," said Howard Archer of the market analysts Global Insight.

Oil prices have been hovering at their record level of $70 (£37) for months amid concerns about supply from the Middle East and disruption to production in Nigeria, while wholesale gas prices have been volatile since February.

The Bank's monetary policy committee (MPC) has maintained borrowing costs at 4.5% since August last year, reasoning that higher energy prices and increased tax bills would lead to higher wage settlements and stoke inflation pressures.

In its report today, the ONS said the greatest inflationary pressures last month came from domestic and international air fare price rises over Easter, which came in April this year as opposed to March last year.

Soaring gas and electricity bills also pushed inflation up, reflecting sharp rises imposed by suppliers earlier in the year. Higher utility bills are expected to continue to put upward pressure on inflation this month and beyond after Scottish & Southern Energy increased gas bills by 16.5% and electricity bills by 9.4% on May 1.

The main downward pressure came from restaurants and hotels, mainly due to the prices of restaurant meals and sales of alcohol rising by less than last year. Changes in the cost of furniture also had a downward impact.

While some analysts do not expect a rate rise until next year, they accept that the chances of an earlier rise cannot be ruled out.

"We acknowledge that the hawks at the Bank of England could push for an early interest rate hike, particularly if the housing market continues to strengthen or consumer spending firms appreciably," Mr Archer said.