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Fuel costs push inflation to 2.5% in the UK

The Office for National Statistics (ONS) has said Consumer Price Index inflation rose to 2.5% from 2.2% in May, well above the government's 2% target. The headline rate of RPI inflation, which includes mortgage interest payments, rose from 3% to 3.3%. The pound rose against the dollar and the euro after a government report showed inflation accelerated to a nine-month high in June. Evidence of faster inflation fueled speculation that the Bank of England will increase interest rates before the end of the year. Speculation of higher borrowing costs has pushed the pound up 6% against the dollar this year. An index of house prices rose in June by the most in more than two years. The rise could put pressure on the Bank of England to raise interest rates to keep inflation under control. The latest inflation figure matches the highest level since the CPI measure was introduced in 1997. "The figures are pretty nasty. The rise in inflation was well in excess of market expectations," said Investec economist Philip Shaw. Against the euro, the U.K. currency rose to 68.59 pence at 10:19 a.m. in London, from 68.83 pence late yesterday. The pound was also at $1.8245 from $1.8197 late yesterday. Consumer prices rose 2.5 percent from June 2005, matching the level in September, which was the highest since the series began, the Office for National Statistics in London said today. The reading exceeded the 2.3% median prediction in a Bloomberg survey of 32 economists. Prices increased 0.3% in the month. While higher fuel bills are causing inflation worries, policymakers are also concerned that bigger bills are cutting disposable income and may cause consumers to tighten their purse strings. Howard Archer, chief economist at Global Insight, added that the underlying picture was not as alarming as it first seemed as most of the rise was down to rising gas and utility bills. "What is clear though is that the Bank of England will be ever more watchful for any signs that second round inflationary effects are increasingly beginning to develop from high oil and energy prices, particularly as oil has recently spiked up to new record highs," he added. While some analysts do not expect a knee-jerk rates rise from the Bank's rate-setting committee next month, many believe that a rate increase will come sooner rather than later. "The Monetary Policy Committee should now be plotting how soon they can hike rates back up to 4.75% without denting recovery momentum," said David Brown, chief European economist at Bear Stearns International. The Monetary Policy Committee should now be plotting how soon they can hike rates back up to 4.75% without denting recovery momentum. BBC quotes David Brown from Bear Stearns International. Gross domestic product may have increased 0.7 percent from the January-March period, matching the rate in the previous two quarters, according to the median of 34 forecasts in a Bloomberg News survey. Traders increased bets that the BOE will raise interest rates this year, from 4.5% currently, interest-rate futures prices show (BBC News, Bloomberg)