UK inflation up - and down

The UK's main rate of inflation rose to 3.0% in April - up from 2.6% the previous month.

Higher mortgage costs through the abolition of tax relief on interest payments - the Miras scheme - along with increased tobacco duties announced in the Budget pushed the headline figure up.

But the underlying rate, which excludes the cost of mortgage interest payments, fell to a record low of 1.9%, below the government's target of 2.5%.

Cuts in the cost of water and sewerage services imposed by the industry regulator, Ofwat, along with easing motoring costs after the jump in oil prices earlier in the year, helped to offset upward pressures.

Mortgage repayments have pushed the headline rate up

The underlying rate was 2% in March, which was the only time other than October 1994 that it had been at that level since the current measure of inflation began in 1975.

The fact that inflation is well below the government's target suggests that the Bank of England's tough interest rate policy is having an effect - and that it may not have to raise rates further.

Puzzle over sterling

However, some economists warned the UK figures were flattered by the effect of a strong pound which reduces the cost of imported goods.

"Domestic inflationary pressures aren't strong, but much of underperformance has been due to the strength of sterling. If that abates or goes into reverse, then we will have a bigger problem," said Adrian Schmidt of Chase Manhattan.

The Bank's deputy governor, Mervyn King, has made it clear that it would be wrong to target the pound-euro exchange rate, although the Bank takes into account the level of sterling in its interest rate deliberations.

Much of British industry would like a lower exchange rate to help boost exports.

The Bank's nine-member Monetary Policy Committee will also watch average earnings and employment figures due on Wednesday and retail sales figures on Thursday for signs of inflation further down the track.

The MPC left interest rates unchanged this month at 6% and, while some analysts believe rates may have now peaked, any evidence of future inflation will add to the chance of another rate rise.

The Bank of England has a symmetrical inflation target, which means it must ensure that inflation does not fall too low as well as rise too high.