Headache over rates as inflation hits highest since 1992

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It is now more than double the 2% target set by the Government and the highest since 1992 when Britain was last in the grip of recession.

Economists warned that rising food and energy prices are likely to push inflation towards, or even above, 5% before the end of the year, giving the Bank little scope to cut interest rates despite the threat of another recession.

Philip Shaw of Investec said: "A perilously weak economy has prevented the committee raising rates, but inflation is likely to prevent rate cuts before early next year."

The pound fell against the dollar, down 1.11 cents at $1.8999, as fears over the state of the British economy grew.

George Buckley of Deutsche Bank said Britain is already in recession. But with inflation on the rise there is little in the way of interest rate cuts the Bank can do to breathe life into the ailing economy.

All eyes will be on Bank Governor Mervyn King tomorrow when he delivers what is likely to be a hardline stance in the Bank's quarterly Inflation Report.

Vicky Redwood of Capital Economics said: "While we still think the monetary policy committee could cut rates before the end of the year, a cut within the next couple of months looks well off the agenda — a message likely to be reinforced in tomorrow's Inflation Report.

"Indeed, a rate rise is still a possibility."