Britain's inflation rate slowed more than expected to its weakest rate in seven months in May as the cost of utility bills and food came down.
The Office for National Statistics said today consumer prices rose 0.3 per cent last month, taking the annual rate down to 2.5 per cent - the lowest since October but firmly above the 2 per cent target - from 2.8 in April.
Sterling fell, and stocks and government bonds rose as analysts had predicted a 2.6 per cent reading, but economists said the Bank of England (BoE) may still have to increase interest rates to at least 5.75 per cent this year to control price pressures.
BoE Governor Meryvn King warned yesterday that the central bank may have to increase borrowing costs for a fifth time since August if data continued to show the economy straining against the buffers and firms eager to push up prices.
Consumer price growth has eased considerably from the decade high of 3.1 per cent hit in March - a rate that forced Mr King to write an explanatory letter to government - and most economists expect inflation to fall back towards target this year.
But, alarmingly for policymakers, survey evidence has shown industry more than ready to increase prices to repair profit margins damaged in last year's spike in energy costs.
Earlier this month, the Chartered Institute for Purchasing and Supply said factory gate inflation picked up in May to equal a record high. Another survey showed British manufacturers intending to raise prices at the fastest rate in 12 years.
Official data shows steady factory gate price growth - but the cost of raw materials soaring, which could feed through to high street prices in the coming months.
Overall, housing and household services cut 0.23 percentage points off the headline rate. There was a further downward impact from falling vegetable and meat prices.
The main upward pressure came from transport following large increases in the cost of air travel.