Inflation hike stokes pressure on Bank

Official figures showed producer output prices rose 4.2 per cent year-on-year in December, above forecasts for an annual rise of 3.9 per cent and the highest annual rate since April.

At the same time, input price inflation hit 12.5 per cent, well above forecasts and also the biggest annual increase in eight months.

Economists said the figures would heap further pressure on Bank of England rate-setters as they attempt to balance stubbornly high inflation with fears of a return to recession.

Royal Bank of Scotland economist Ross Walker said: "This makes very uncomfortable reading for the Bank of England and it will cast further doubts about how far and how fast retail and consumer price inflation will retreat in the second half of this year."

Financial markets have increasingly brought forward their predictions for a an interest rate rise to as early as May, due to growing inflation expectations on bond markets and among the general public. On Thursday, the central bank's monetary policy committee (MPC) opted to hold rates at an historic low of 0.5 per cent for the 22nd month in a row.

A rise in the cost of crude oil over the year accounted for almost half of the annual leap in input cost inflation, according to yesterday's data from the Office for National Statistics. Increases in food and imported metals were also factors.

Howard Archer, chief UK economist at IHS Global Insight, the forecasting group, said: "The data show mounting inflationary pressures in the supply chain, adding to the Bank of England's problems and increasing pressure for an interest rate hike sooner rather than later."

David Kern, chief economist at the British Chambers of Commerce, said the figures were "higher than expected".

He added: "While interest rates will have to increase this year, it is important for the MPC to wait until the initial impact of the austerity measures have been absorbed. Premature action risks derailing the recovery."