Energy price rises are set to push inflation up by nearly 1 per cent to a 16-year high of 5 per cent, far above the Bank of England’s 2 per cent target, economists have forecast.

The Bank gave warning in May that the CPI measure of inflation could rise to more than 4 per cent this year before falling again. But economists including George Buckley, chief UK economist at Deutsche Bank, said that inflation could rise by an additional 0.9 percentage points if other energy companies follow the lead of British Gas and EDF Energy by introducing large price increases this month. This would drive CPI inflation up to 5 per cent as early as next month, said Philip Shaw, UK economist at Investec.

Mervyn King, the Bank’s Governor, has said repeatedly that the uncertainty about timing and size of energy price increases over the summer was a critical issue for the rate-setting Monetary Policy Committee (MPC).

In the Bank’s last inflation forecast, published in May, it said that higher energy prices were likely to force up inflation, but economists said that the recent energy price rises have been higher than than the Bank expected.

However, most City economists continue to believe that, having anticipated this factor, the Bank will keep base rates on hold, unless there are signs that the short-term jump is stoking further price pressures.

There was little sign that this was the case from pay data published yesterday. Wage settlements in the three months to June averaged 3.5 per cent, down from 3.6 per cent in the three months to May, figures from Incomes Data Services show, signalling that the higher cost of living has not been reflected in higher pay packets.

The MPC fears that higher wage bills would cause firms to increase their prices, further fuelling inflation.

However, a number of economists feel that the higher peak for inflation means that any short-term move in interest rates is now more likely to be an increase than a cut. Vicky Redwood, of Capital Economics, said: “If the committee were seriously minded to raise rates, now would be the time to do it.

“The quarterly inflation report is published a week after the meeting, giving the committee the opportunity to explain a rate change more clearly.”

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