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Date: Tuesday 15 Jul 2008

LONDON (ShareCast) - Interest rates could be heading higher as figures for last month showed soaring food and fuel prices sent annual inflation to its highest since records began at the start of 1997.

Consumer price inflation jumped to 3.8% in June, up from 3.3% the month before, trumping analysts’ forecasts for a 3.6% increase.

Today’s number is almost double the Bank of England’s 2% target and may be heading towards 5% or even higher later this year warned Citigroup economist Michael Saunders.

Central bank governor Mervyn King has already acknowledged that inflation is likely to top 4% this year.

Rising food and transport costs were responsible for much of the increase, with food and soft drinks up 2.1% for the month and 9.5% on the year and transport 7.3% higher annually.

In a speech earlier today, policymaker Andrew Sentence outlined the Monetary Policy Committee’s dilemma in having to balance the economic slowdown against the dangers of runaway inflation.

MPC members voted to keep interest rates at 5% last week, deciding that the threat of recession is currently too great to start tackling soaring inflation with higher borrowing costs.

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