Inflation rise 'could increase interest rates

Inflation rose by a quarter in November to its highest level in five months, official figures revealed today, surprising analysts who had expected the rate to remain unchanged.

The Office for National Statistics (ONS) said the consumer prices index climbed to 1.5% last month, a rise of 0.3 basis points from October's level of 1.2%. Inflation is now at its highest rate since June, although still well below the government's target of 2%.

David Page, economist at Investec, said: "This is a big surprise. What surprised us was firstly the resilience of the energy prices, which we didn't expect to rise so much."

He added, however, that next month's data would probably show a fall: "I would be surprised if it jumped this much and stayed there."

The ONS said the main drivers behind the increase were rising air fares, higher fuel costs and petrol prices.

The price of foreign holidays also climbed, having fallen during November last year.

Household energy bills rose faster too, due to significant increases in gas and electricity tariffs by major suppliers in September. Some analysts had expected the growth in energy costs to weaken in line with a recent fall in oil prices. Stronger price increases were also recorded for food - particularly some fruits - and household textiles.

The unexpected rise will fuel speculation that interest rates may rise again next year.

Howard Archer, chief UK economist at Global Insight, said: "While a lot of the increase can be attributed to high oil and energy prices, the Bank of England will nevertheless be concerned that underlying inflationary pressures are starting to feed through increasingly.

"The rise in consumer price inflation reinforces our belief that the next move in interest rates will be up, unless the housing market shows clear signs of slumping."

Most analysts believe, however, that with consumer price inflation still comfortably below 2%, the Bank can afford to leave rates unchanged for a few months to seek greater clarity on the economy and the housing market. "We expect a 25 basis points rise to 5% around April," Mr Archer said.

However, Ross Walker, UK economist at RBS Financial Markets, indicated that an upward hike may come sooner. "For several months we've been observing more inflation at the factory gate, higher commodities inflation and the risk of higher pay settlements," he said.

"There's now just a bit more evidence that inflation is out there. The Bank of England will want to see if this price pressure is sustained over several months - and if it is then the February inflation report is going to be a lot more interesting. These numbers help redress some of the dovish bias that emerged in late summer."

Mr Archer added that inflationary pressures stemmed from the lack of an output gap, the tight labour market, producer output price inflation - at a nine-year high in November - and sterling's recent retreat. "The pressures will increase further if growth picks up to some extent over the next few months, as we consider likely," he said.

Analysts also believed today's figures were likely to have a positive effect on the pound. Riz Din, a currency strategist at Barclays Capital, said: "The data was on the higher side of expectations and we should get a pick-up in sterling.

"There is a chance that the market will be a little bit more aggressive in its rate hike expectations, but it's a question of watching the data on a week-by-week basis. We still see some downside risks from retail sales on Thursday."

The consumer prices index differs from the old measure Retail Price Index because of the absence of housing and council tax costs. Today's figures showed that headline RPI, which includes mortgage interest payments, rose by 0.1% to 3.4%, while the underlying rate rose by 0.1% to 2.2%.