Inflation spike unlikely to stop rate cut

Strong price rises at the petrol pumps as war in Iraq pushed up the cost of crude oil kept inflation pinned above the government's target last month.

Underlying RPIX inflation, which excludes mortgage interest repayments, held steady at 3% in March, while the headline rate eased slightly to 3.1% from 3.2% in February, according to the office for national statistics.

Budget increases in beer and cigarette duty and sharp rises in council tax could send inflation even higher in the coming months.

Analysts pointed out that many of the upward pressures on the cost of living - such as the spike in petrol prices and the introduction of the congestion charge in London - were temporary and would not ease the pressure on the Bank of England's monetary policy committee to cut rates at its meeting next month.

"We maintain our view that the inflation outlook will not prevent further reductions in interest rates if, as we expect, the activity picture warrants them," said Jonathan Loynes of Capital Economics. "We continue to expect interest rates to drop to 3% by the end of the year."

The MPC will present its quarterly forecasts for the economy next month.

The City believes the committee will downgrade its growth projections for 2003 and 2004 and as a result cut borrowing costs by a quarter percentage point from their present 48-year low of 3.75%.

The detail of yesterday's inflation figures showed petrol and oil prices up 10% against a year ago, while housing depreciation exerted a downward pressure on inflation as the government's index of house prices fell between February and March - unlike the measures used by Nationwide and the Halifax.

Annual inflation on the in ternationally comparable harmonised index of consumer prices or HIPC measure, which the chancellor is considering adopting as the official yardstick, was just 1.6%. In February, the latest for which data for other countries is available, put Britain well below the 2.4% average in the eurozone.

In a separate announcement yesterday, the ONS estimated that when it comes into force in September, its new method of measuring the output of the economy will knock 0.2 percentage points off output growth for 2001 and 0.1 percentage points for 1999 and 2000 respectively.