A nasty surprise on UK inflation is likely tomorrow after the Bank of England unexpectedly raised interest rates to 5¼ per cent last week.

The consensus forecast suggests UK consumer price inflation will rise from 2.7 per cent in November to 3.1 per cent in December, the highest since August 1992.

The Bank of England saw the data before their public release so it can say that steps have already been taken to address the overshoot of the 2 per cent inflation target.

However, Mervyn King, the governor of the Bank of England, faces the potential embarrassment of having to write a letter to Gordon Brown, the chancellor, to explain why inflation has risen to a 14-year high.

A February rate rise had been widely expected, but the decision to move a month earlier has increased uncertainty about the outlook for monetary policy.

Many economists have now revised their forecasts for interest rates higher. Geoffrey Dicks at the Royal Bank of Scotland expects a further rise for rates in May to 5½ per cent, a six-year high. Mr Dicks said inflation should retreat below 2 per cent by the middle of this year and he expects the rate increases to be reversed by the end of 2007 or early in 2008.

But that depends on the next round of wage increases. The Bank of England's move was widely seen as a signal to wage setters that earnings growth must be kept under control.

The headline measure for earnings growth was running at 4.1 per cent in October, against the 4.5 per cent that the bank considers consistent with price stability.

The consensus forecast for November's data, due on Wednesday, is for an increase of 4.2 per cent. The headline measure compares earnings in the latest three months with the same period a year ago, smoothing growth.

However, the breakdown of the latest monthly figures reveals why concern is mounting.

Private sector service earnings rose 4.7 per cent in October compared with the same month in 2005, while manufacturing earnings rose by 5.3 per cent.- ( Financial Times service )