UK inflation rate rise continues

Many consumers saw their gas bill rise in 2004

Rising household utility bills helped to push December's UK inflation rate to its highest level since June last year, according to official figures.

The Office for National Statistics (ONS) said the consumer price index showed a 1.6% annual rise in December, up from 1.5% the previous month.

Housing, water, electricity and gas prices were up 5.4% on the year.

The inflation rate was also pushed higher by the rising cost of furniture and recreational items.

The all-items headline RPI rate rose to 3.5% from 3.4%. The underlying RPI rate, which excludes mortgage interest payments, climbed to 2.5% from 2.2% in November.

It's probably fair to conclude that the chance of near-term rate cuts is slightly lower Alan Castle, Lehman Brothers

Most analysts had not been expecting inflation to increase.

"The further rise in annual consumer price inflation to 1.6% in December is a surprise," said Howard Archer, economist at Global Insight.

He pointed to the retreat in oil prices from October's peak levels "and the significant discounting on the High Street as retailers fretted about moderating consumer spending".

Air fares

Festive gifts, computer games, some toys and theatre tickets all helped push the annual rate higher. The prices of these items had fallen in December 2003.

Further rises came from a bigger seasonal increase in air fares, compared with a year ago.

The news means that inflation remains below the government's target of 2%, but December's unexpected rise means that interest rates, at 4.75%, could still rise again this year.

In the short term, analysts say it could see the Bank of England keep interest rates on hold in February, rather than introduce any cut.

"It's probably fair to conclude that the chance of near-term rate cuts is slightly lower and it probably makes it less likely that there will be a big shift in policy at the February Inflation Report," said Alan Castle, UK economist at Lehman Brothers.