Utility bills to push inflation sharply higher

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Changes in utility bills used to be phased into the index over several months but a change in the Office for National Statistics' calculation methods mean they will now have an immediate hit.

Analysts polled by Reuters ECONGB expect consumer prices to have leapt 0.8 percent on the month, lifting the annual rate to 2.5 percent. If realised, this would be the highest rate since May.

Gas tariffs rose by 13 percent and electricity prices by 9.5 percent in February, according to Philip Shaw at Investec who calculates the combined effect will be to add 0.35 percentage points to the overall rate.

Consumer price inflation hit 2.2 percent in January and has been running above the Bank of England's 2 percent target since October.

The central bank has so far taken a gradual approach to cutting interest rates but investors are betting the pace may quicken as the credit crisis deepens. Short sterling interest rates futures leapt on Monday to price in at least 100 basis points of easing by the end of the year.

With oil and food costs still soaring, Bank policymakers have warned that price pressures are likely to get worse before they get better.

Bank Governor Mervyn King indicated recently there was a good chance inflation would rise above 3 percent, a level that would require him to write a letter to the government explaining why it had risen so far above target.

"Looking ahead, it remains touch and go as to whether the Monetary Policy Committee will have to write another letter to the Chancellor," said Paul Dales at Capital Economics.

"For now, our profile suggests that inflation will peak at 2.9 percent but further rises in food and energy prices could have Mr King reaching for his pen."

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