Petrol and air fares push inflation to 2½-year high

SOARING petrol prices, increased air fares and duty taxes imposed on alcohol in the recent Budget sent inflation up to 4.5 per cent in April, raising fears that interest rates could rise from their current rock bottom level.

The Consumer Price Index (CPI), which is calculated using the cost of a specially selected basket of goods by the Office for National Statistics (ONS), rose from its previous level of 4 per cent to a 31-month high - and is likely to hit 5 per cent by the end of the year, economists have claimed.

The last time inflation rose higher than 4.5 per cent was in September 2008, at the height of the banking crisis, when it reached a record 5.2 per cent.

But Bank of England governor Mervyn King, who has to write a letter of explanation to Chancellor George Osborne if the inflation rate goes one percentage point above the government's target figure of 2 per cent, argued that the January VAT increase and higher energy and import prices had skewed the figures - and claimed that without these factors, inflation would have been below target.

"Although the impact on inflation of these factors is difficult to quantify with precision, it is likely that had they not occurred, inflation would have been substantially lower and probably below the target," he wrote. The ONS said core inflation, which strips out more volatile sectors such as food, energy, alcohol and tobacco, hit 3.7 per cent - a record high since records began in January 1997.

Union leaders warned that the increase had put extra pressure on already stretched family budgets. "We know many low-paid workers, for example care and health care assistants, already struggle with heavy debt," said Unison general secretary Dave Prentis.

Experts warned that interest rates, which currently stand at 0.5 per cent, could start to shoot up as early as August, as policymakers battle to keep inflation down. Such a move would increase the cost of an average household's annual mortgage bill - despite Mr Osborne's reply to Mr King's letter, which acknowledged that the government's fiscal austerity plan gave the central bank the scope to leave interest rates lower for longer.

Howard Archer, chief economist for IHS Global Insight, said: "The spike up in consumer price inflation will inevitably fuel expectations that the Bank of England will hike interest rates before the end of the year. Indeed, it is likely to significantly boost expectations that the Bank will act as soon as August."

But Liz Cameron, chief executive of Scottish Chambers of Commerce, said the fact the majority of the inflation rise had come from transport and "external" factors such as tax rises, meant a rate rise would be unlikely - although she warned that the Scottish economy remained in a fragile state.

She said: "This rise in inflation is not entirely unexpected given increasing transport costs and the medium-term expectations of the Bank of England."

However, she added: "The economic recovery remains patchy at the present time and the rise in inflation should not be seen as a signal to increase interest rates."

The rise was fuelled by a 2.8 per cent increase in transport prices between March and April, driven by a 29 per cent rise in air travel - while alcohol rose by 5.3 per cent between March and April 2011 compared with a rise of 2.1 per cent a year ago.