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UK Inflation Soars on Utility Bills

British inflation leapt further above target to a nine-month high in February, but the jump was purely due to changes in the way utility bills are calculated, official data showed on Tuesday.

The Office for National Statistics said consumer prices rose 0.7 percent last month, taking the annual rate to 2.5 percent, as forecast by economists and well above the government's 2.0 percent target.

The statistics office announced last month that changes in gas and electricity bills would hit the index immediately rather than being phased in over several months.

Without the change in methodology, CPI inflation would have held steady at 2.2 percent, the ONS said.

Still, the figures highlight the dilemma facing the Bank of England as it confronts a slowing economy and rising price pressures.

Investors are betting the Bank will cut interest rates by 100 basis points before the end of the year to shore up the economy as the global credit crisis deepens.

However, the central bank may be constrained by concerns inflation will rise even higher in the coming months.

"I don't think the Bank of England is going to go in April. A lot will depend on how the markets go between now and the meeting," said George Buckley, chief UK economist at Deutsche Bank. "I think we're going to move in May."

The pound hit session highs versus the dollar and euro, having earlier pared gains, while stocks briefly extended gains after the CPI data came in as expected -- trimming expectations for near-term rate cuts.

Core inflation, which strips out oil and food prices, eased to 1.2 percent in February, its lowest rate since August 2006.

Contact Europe: Economy

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