May rates rise likely as petrol pumps inflation

The biggest fall in clothing prices on record failed to prevent inflation rising last month, official figures showed yesterday, as motorists paid the price of mounting tension in the Middle East.

Dearer petrol at the pumps pushed up underlying inflation - which excludes mortgage interest repayments - to 2.3% in March, from 2.2% in February, the office for national statistics said.

Petrol prices rose after the cost of global oil soared by more than $5 a barrel as escalating military action in the Middle East compounded the effect of supply cuts by the oil-producers' cartel, Opec. Statisticians said the rise contrasted with a fall in petrol prices a year earlier, when the chancellor caved in to the demands of the fuel protesters and cut excise duty in the 2001 Budget.

Higher petrol prices more than offset the 5.6% annual fall in the price of clothing and footwear - the largest since records began in 1947. Fierce competition in the shops has put strong downward pressure on clothing prices in recent months, despite strong consumer demand.

The ONS said the cost of children's clothes had fallen particularly sharply in March, to levels 10% lower than the same month last year, but women's clothes were also 9% cheaper than in March 2001.

The 2.3% underlying rate of inflation still came in safely below the government's 2.5% target, but analysts said it could rise further as the rest of the oil price increase feeds through to the pumps.

"[In the] near term there is a risk that underlying inflation could move back above its 2.5% target," said Gerrard analyst Simon Rubinsohn. "The March figure was based on the cost of unleaded petrol at 71p per litre. Since then it has risen to on average nearer 75p."

Headline inflation - which includes mortgage payments - was also higher than in February, at an annual rate of 1.3%, reflecting a fall in mortgage payments in March last year after the Bank of England cut interest rates a month earlier from 6% to 5.75%.

Michael Saunders, of Salomon Schroder Smith Barney, said yesterday's figures confirmed that average underlying inflation in the first three months of the year had been higher than the Bank of England's forecast - and he forecast that as a result, interest rates could rise as early as next month. "With inflation surprising on the upside, and little sign of the consumer slowdown expected by the monetary policy committee, we continue to expect that base rates will rise in May, probably by 0.25%," he said.

MPC members have repeatedly expressed concern about the strength of consumer demand and the build-up of household debt.

They will be watching the chancellor's Budget carefully tomorrow for tax measures that might put the brakes on spending and allow them to keep rates lower for longer. The Treasury insisted after the MPC's meeting earlier this month that its members had not so far been briefed on Budget measures, which were still being finalised.

The Bank of England made seven demand-boosting interest rate cuts last year as recession took hold of the global economy, but speculation has been mounting in recent weeks that their rate-cutting spree is over.

Canada yesterday became the first G7 economy to raise interest rates - by 0.25% - expressing confidence that "a robust recovery appears to be under way in Canada".