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Last Updated: Tuesday, 17 April 2007, 13:45 GMT 14:45 UK
Rate hike fear as inflation jumps
Money being put into a cash register
Rising milk, petrol and furniture prices were behind the increase
The Bank of England has told the chancellor it is "determined" to bring inflation back to its 2% target after the measure jumped to 3.1% in March.

The Bank was forced to write to the government after the Consumer Prices Index rose to more than one percentage point above the government's target.

The increase is expected to trigger a further rise in UK interest rates.

Figures also showed that a wider inflation measure, RPI, rose to 4.8% in March, up from 4.6% the month before.

READ THE LETTERS

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The pound soared on currency markets as a result, briefly passing through the $2 level.

Opposition parties seized on the news as a chance to attack Chancellor Gordon Brown on a day when he faces a no-confidence motion.

"Gordon Brown's reputation for economic competence is unravelling before our eyes", said Conservative shadow chancellor George Osborne.

Liberal Democrat economics spokesman Vince Cable said the news "gives lie to the claim that the Government has permanently achieved a nirvana of steady growth without inflation".

Petrol costs

The governor of the Bank of England, Mervyn King, was forced to write the letter of explanation to Chancellor Gordon Brown because the CPI measure was more than one percentage point above the government's 2% target.

It is the first such letter written by the Bank since the government handed it control of monetary policy in 1997.

In it, Mr King said that inflation had exceeded 3% in March because since February oil prices had risen by about 25%, reversing part of the fall in prices seen in the second half of last year. The oil price rise pushed up petrol prices.

In addition, some of the falls on food prices seen a year ago were not repeated in March this year, while retailers pushed up the prices of furniture and furnishings.

However, Mr King said that, "at first sight", the price data seemed unlikely to alter the outlook painted in the Bank's last quarterly inflation report.

This is a thoroughly nasty set of data that essentially guarantees that the Bank of England will raise interest rates
Howard Archer, Global Insight

And he said that the CPI measure was "likely to fall back within a matter of months" as big increases in household gas and electricity prices that occurred a year ago cease to have an impact on inflation.

In his reply to Mr King, the chancellor said he noted the reasons the Bank had given for the rise in inflation and welcomed the Bank's confirmation it would continue to set interest rates to meet the 2% inflation target in the medium term.

"I agree that the Monetary Policy Committee's approach is appropriate to meet the government's monetary policy objectives - namely to maintain price stability," Mr Brown said.

Rate rise

The Bank of England has raised UK rates three times since August last year in an attempt to contain inflationary pressures.

At its last rate-setting meeting earlier this month it kept rates at 5.25%, but following the latest inflation figures analysts now expect the Bank to lift rates in May to 5.5%, and possibly beyond.

Evan Davis
Inflation is volatile right now, largely due to energy price swings
Evan Davis,
BBC economics editor

"This is a thoroughly nasty set of data that essentially guarantees that the Bank of England will raise interest rates by a further 25 basis points to 5.5% in May," said Howard Archer, economist at Global Insight.

"Furthermore, there is a markedly increased possibility that interest rates will rise further still further out.

"Worryingly core inflation climbed to 1.9% in March, while the rise in retail price inflation to a near 16-year high of 4.8% maintains the risk that wages could yet move higher."

Inflation battle

The Office for National Statistics (ONS) said CPI inflation jumped 0.5% in the month, a rise which lifted the annual rate to 3.1% - the highest since the series began in January 1997 - from February's rate of 2.8%.

"There appears to be more inflation in the system which is demand led than what we had previously expected, allowing retailers and manufacturers to restore their margins," said Jonathan Said, senior economist at the CEBR.

"However, the fact that the Bank of England kept rates on hold in April probably means that their medium term inflation expectation has remained unchanged - implying that the central forecast should remain one of rates peaking at 5.5% in May.

"Nevertheless, increased upside inflation risks are emerging, so that there is a larger chance that inflation will struggle to get back to target as soon as we had expected."


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