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• CPI rises to 3.2% in February
• King predicts 'sharp decline' soon as utility costs fall
The headline rate of inflation proved to be surprisingly resilient last month due to higher than expected food prices - confounding expectations among City economists of a fall.
The government's preferred measure of inflation, the consumer prices index (CPI), rose to an annual rate of 3.2% in February from 3% the month before, according to figures from the Office for National Statistics.
Higher food prices, in particular meat and vegetables, and soft drinks were responsible as the weaker pound and a poor crop in Spain made imported products more expensive.
The unexpected rise in inflation forced Bank of England governor Mervyn King to write another letter to the chancellor to explain why the rate had held more than a percentage point above the central bank's 2% target. He warned, however, that inflation would fall by "around a percentage point" in coming months as several major gas and electricity suppliers have reduced their prices, and the economy weakens.
King wrote: "Despite the increase in CPI inflation in February, we believe that the sharp decline in CPI inflation since its peak in September is likely to resume in the coming months."
He added that it was likely that inflation would move below its 2% target over the next 12 months but cautioned that the path of inflation could remain unpredictable.
City experts agreed with the governor. Philip Shaw, chief economist at Investec, said: "Overall it doesn't shake our belief that inflation will head significantly below target in the coming months."
James Knightley at ING concurred, saying: "Utility tariff cuts will be feeding through very strongly from the March report onwards while weaker economic activity will also constrain corporate pricing power and help to drive CPI lower in coming months."
Sterling hit a six-week high against the dollar and a one-week high against the euro after the inflation figures were released. It rose by more than half a cent to $1.4778.
The ONS data also showed that the retail prices index (RPI) - the broadest measure of inflationwhich includes mortgage payments and housing costs - slipped to an annual rate of 0% last month, defying widespread expectations of a decline into negative territory.
It was the weakest reading since March 1960, the last time Britain suffered a period of price deflation.
City economists had expected the RPI to fall to -0.8% in Februarybut now think it could fall as low as -4% later this year as tumbling interest rates, mortgage costs and the reduction in energy bills feed through.
Shaw said: "RPI inflation is stubbornly avoiding going into negative territory, but we think it's only a matter of time before it does."
If the RPI turns negative in coming months as expected, many workers will suffer as the index is used as a benchmark in wage negotiations.
A number of companies have already imposed pay freezes and some have even reduced pay. Workers at Honda's car plant in Swindon were told yesterday they will have to take a one-year pay cut (likely to be 10%), while Vodafone confirmed it was freezing the salaries of its 10,000 UK staff and would probably scrap bonuses.
As falling earnings prompt a sharp decline in consumer spending, a prolonged period of deflation could push Britain's economy into the kind of stagnation suffered by Japan in the 1990s and into this century.
Pensions and state benefits are also calculated on the basis of RPI, although pensioners will not suffer as much as feared, at least not for a while. Each spring, the state pension is raised in line with RPI from the previous September. This year pensioners will benefit from the fact that RPI hit a record high of 5% last September driven by surging oil prices.
The government has also pledged not to reduce any state benefits, which will be raised by on 6 April.
High food prices push inflation up to 3.2%
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