Inflation alert sparks interest rate worries

Published on Tuesday 20 March 2007 14:43

A KEY measure of inflation has reached its highest level for more than 15 years, fuelling fears of further interest rates rises.

Figures from the Office For National Statistics (ONS) show the Retail Price Index (RPI) jumped to 4.6 per cent in February from 4.2 per cent the previous month, its highest level since August 1991.

Economists blamed the increase on rising mortgage payments as lenders passed January's shock quarter-point interest rate hike to homeowners.

The Consumer Prices Index (CPI), which is the Bank of England's official measure, also rose to 2.8 per cent in February from 2.7 per cent, fuelled by rising air fares, food, furniture costs and car purchases. The increase came despite a fall in the cost of petrol.

The rise in both measures was ahead of analysts' predictions of RPI inflation at 4.3 per cent and CPI at 2.7 cent for February.

The Bank of England CPI inflation target is two per cent and today's figures show the marker creeping back towards the three per cent threshold at which governor Mervyn King would have to write an open letter to Chancellor Gordon Brown explaining the rise.

Howard Archer, chief UK and European economist at Global Insight, said: "We suspect that February's inflation data reinforces the likelihood that the Bank of England will raise interest rates by a final quarter-point to 5.5 per cent in April or May as a precautionary measure against medium-term inflation risks."

Economist Rob Carnell of ING Direct said: "Today's figures are a timely reminder that the Bank of England's tightening work is probably not yet finished."

Falling gas and electricity prices following the recent price war between energy companies are expected to send inflation down later this year as households start to benefit from a cut in heating and energy bills.

The doubling of Air Passenger Duty on February 1 was the main driver of CPI inflation and added an average ten per cent to air fares, the ONS said.

Other factors contributing to RPI inflation, alongside mortgage payments, were household goods, where prices for furniture and household equipment recovered from January sales.

Prices for bread, cereals, meat, fruit and vegetables also rose despite price cuts for milk.

RPIX inflation - the all-items RPI index which excludes mortgage payments - also rose to 3.7 per cent in February compared with 3.5 per cent the previous month.