Inflation hits eight-year high

Britain's inflation rate has risen to its highest level in eight years, official figures showed today.

The Consumer Prices Index (CPI) rose to 2.4% in August from 2.3% in July, the Office for National Statistics (ONS) said.

The underlying rate of RPI (Retail Price Index) inflation fell to 2.3% last month from 2.4% in July, while the headline rate of RPI inflation, which includes mortgage interest payments, fell to 2.8% in August from 2.9% in July, the ONS added.

Last month's rise was again driven by higher petrol prices after the surge in the price of crude oil. The average cost of a litre of petrol rose by around 3p in August, up from an increase of about 0.5p a year ago, the ONS said. This took inflation to its highest level since CPI records began in January 1997.

The effect of higher petrol prices has outweighed the prolonged discounting on the high street this year. Downward effects came from price reductions on clothes and prerecorded DVDs, videos and CDs as well as cheaper theatre and concert tickets.

Furniture also contributed, with evidence that summer sales usually held in July were delayed until August this time round.

Gavin Redknap, economist at banking group Standard Chartered, said the Bank of England would take heart from the fact that core inflation remained weak.

But he added: "As queues at the pumps continue to lengthen, the Bank will be keenly aware of the possibility of strengthening inflationary pressures in the months ahead."

He said the rise in fuel prices looked contained for the moment, but that policymakers would be watching for proof of higher prices passing through into higher wages.

Economist Thushani Gajasinghe, at the Centre for Economics and Business Research, said the Bank would be keeping a close eye on inflation, but the continued slowdown in consumer spending meant it was likely to keep interest rates at their current level for the rest of the year.

Inflation should continue to rise despite last month's cut in interest rates, as higher petrol prices triggered by Hurricane Katrina are included in ONS figures.

"In the coming months inflation is likely to rise even further due to the higher cost of fuel and food," said John Butler, of HSBC.

He expected CPI inflation to peak in November at 2.7%.

In its quarterly inflation report last month, the Bank of England predicted that CPI inflation would rise above the government's 2% target in the short term. The Bank said it would then ease off before once again passing this level at the end of the two-year forecast period.