UK inflation hits nine-month high

Inflation in UK hit its highest level last month in nine months as statisticians changed the way they calculate rocketing utility bills.

The Office for National Statistics said yesterday consumer prices rose 0.7 per cent last month, taking the annual rate to 2.5 per cent, further above the government's two per cent target, as expected. Without the change in methodology, CPI inflation would have held steady at 2.2 per cent as tariff increases would have been phased in over several months leading to a more gradual pick up in inflation than the sharp jump registered last month.

Still, the figures highlight the dilemma facing the Bank of England as it confronts a slowing economy and rising price pressures.

Investors are betting the Bank will cut interest rates by 100 basis points before the end of the year to shore up the economy as the credit crisis deepens. However, the central bank may be constrained by concerns inflation will rise even higher in the coming months.

Core inflation, which strips out oil and food, eased to 1.2 per cent in February, its lowest rate since August 2006.