Energy bills push inflation up

The squeeze on household budgets tightened further last month as official figures revealed hikes in energy bills and fuel costs sent inflation to its highest level since last May.

The Office for National Statistics (ONS) said Consumer Prices Index (CPI) inflation rose to 2.8% in February, ending a four-month run at 2.7% as the last of the major energy providers pushed through gas and electricity price rises.

Higher petrol costs were also behind the increase in inflation, which puts further pressure on Chancellor George Osborne ahead of tomorrow's Budget as CPI edges even higher above his 2% target.

Higher energy bills saw housing costs rise 0.5% between January and February, while transport prices rose 1.2% due to a 4p-a-litre surge in the cost of petrol and 9% increase in air fares.

CPI continues to outstrip wage growth in the UK and the gap is expected to widen as experts predict inflation will hit 3% by the summer, with the weak pound adding to inflationary woes as it pushes up import costs. But there is mounting speculation that the Government's 2% target could be shifted, with Mr Osborne said to be preparing to overhaul the Bank of England's remit in the Budget.

Facing calls to do more to help the economy, Mr Osborne is expected to launch a review paving the way for a change in the Bank's mandate. It is thought he may give policymakers a dual mandate not just to target inflation, but also include a measure of economic stability, or offer more room to hit the existing inflation target over a longer period.

The Bank has already said it will tolerate above-target inflation to support recovery efforts, warning last month that inflation will rise higher and is not set to return to target for three years.

The figures showed the Retail Prices Index (RPI), which also includes housing costs, dropped to 3.2% in February from 3.3% in January as food inflation eased slightly.

The ONS also published two new experimental measures of inflation for the first time - the CPIH including housing costs and the RPIJ, which has been created to iron out the gap formed by the different methods of calculating the price of goods for CPI and RPI.

CPIH and RPIJ both stood at 2.6% in February, from 2.5% and 2.7% in January respectively. Some economists believe CPIH may eventually be adopted as the main inflation measure, which could give the Bank more leeway, as it has been consistently running below CPI.