Interest rate fears as inflation soars

The Office of National Statistics (ONS), the government’s official number cruncher, said the consumer price index measure of inflation hit 2.9 per cent last month, up from 1.9 per cent 12 months before.

The rise, attributed to a number of one-off factors, was bigger than City expectations of 2.6 per cent. Analysts said the freak numbers were due to a near-record fall in the price of oil, the VAT cut and retailer discounts all happening in December 2008.

But despite the freakish nature of the figures and their unflattering comparison with the previous year, City analysts commented that it could bring the prospect of an interest rate rise forward.

"This number must raise questions at the BoE as to why inflation hasn’t slowed more in the light of the economic decline," said David Page, an economist at Investec. The question now is not whether the BoE will do more quantitative easing, but when it will start tightening."

Meanwhile, George Buckley at Deutsche Bank estimated that inflation would rise above 3.5 per cent and would remain high well into the second half of 2010.

Interest rates currently sit at a record low of 0.5 per cent having been slashed by monetary policy wonks at the Bank of England in an effort to reduce the impact of the recession on British business. 

Related article:Small business costs rising

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