Inflation rise hits interest rate hopes

Britain's inflation rose unexpectedly in December to reach its highest level since June, official figures showed today.

The Office for National Statistics (ONS) said the consumer price index (CPI) rose 0.5% on the month in December, pushing up the annual rate for a third month in a row to 1.6%. Economists had expected a slowdown to 1.4%.

Although December's inflation rate is still well below the government's 2% rate, the increase may have put paid to hopes of an early reduction in borrowing costs.

The Bank of England's monetary policy committee (MPC) last week held rates at 4.75% for the fifth month running and there will be keen interest in the committee's minutes to see whether there was any discussion - as there was last month - of a cut in rates. Analysts said today's figure strengthened the likelihood of a rate rise in the coming months.

"We believe any speculation of a near-term interest rate cut by the Bank of England is premature, even though consumer price inflation is still comfortably below the Bank of England's medium-term target of 2%. Indeed, we suspect that the next move in interest rates may yet be upwards," said Howard Archer, an economist at the consultancy Global Insight.

The ONS said inflation was pushed up by higher seasonal price rises in furniture and furnishings, with widespread price rises for a range of items.

Prices of recreational items, particularly games, toys and hobbies, also contributed to the pickup in inflation as the price of computer games and some toys rose this year compared to a fall a year ago.

Housing water, electricity, gas and fuels component also shot up 5.4% on the year to December, its fastest annual rate since records began in 1997, driven mainly by gas bill increases.

As an internationally comparable measure of prices, the CPI shows that UK inflation has been among the lowest in the EU since the start of 2000. The provisional average inflation rate for the enlarged EU 25 in November, the latest available, was 2.1%, compared with 1.5% in the UK.

Separately, the ONS said the retail price index, the more familiar measure of inflation in Britain, rose to 3.5% in the year to December, the highest since July 1998.