Inflation rise hits hopes for interest rate cut

A SHOCK rise in the cost of living during April hit hopes for interest rate cuts today as inflation soared at its highest pace for nearly six years.

The official Consumer Prices Index (CPI) benchmark of inflation jumped 0.5 per cent to three per cent, shattering City forecasts with its biggest monthly rise since July 2002.

The impact of surging gas and electricity bills, food prices and Budget tax hikes on alcohol and tobacco means Bank of England Governor Mervyn King is on the brink of writing his second letter to the Chancellor to explain the rise.

The Bank is charged with keeping CPI within one per cent of its two per cent target, but Mr King will have to publicly explain himself if inflation moves any higher. CPI last hit 3.1 per cent in March 2007.

Economists had been pencilling in a rate cut to 4.75 per cent to help a slowing economy and ease pressure on borrowers next month, but today's unexpected figures throw that into doubt.

Global Insight's chief UK economist Howard Archer called the data "another horrible surprise" after figures yesterday showed factory gate prices rising at their fastest rate since records began more than 20 years ago.