Money markets are today reported to have increased their expectations that the Bank of England will announce its largest-ever rise in the interest rate after inflation data showed price pressures growing throughout the British economy last month.

The Times reports that bets were placed on a 0.75% rise in the Bank rate next week after official figures revealed rises in core inflation, food prices and services costs.

Figures from the Official for National Statistics showed a dip in headline consumer prices inflation to 9.9% in the year to August - a drop from 10.1% the previous month and defying widespread expectations of another rise.

However, measures of underlying inflation, which strip out volatile energy prices, rose in August.

Food and clothing drove the bulk of the increase, while petrol prices contributed to the fall in the headline rate after a drop in global crude oil prices this summer.

A measure of core inflation that strips out food and energy increased to 6.3% last month.

Julian Jessop, at think tank the Institute of Economic Affairs, said it was "far too soon to sound the all-clear" on inflation and he called for the Bank to raise the rate by a bumper 0.75%, after similar steps by the US Federal Reserve and the European Central Bank in the past month.

More work

"The Bank has more work to do to get inflation back down to the 2% target.

"The Bank's monetary policy committee (MPC) therefore needs to be bolder to restore credibility. Raising rates by 75 basis points at the rescheduled meeting next week, rather than the expected 50 basis points, would still leave rates at the historically-low level of 2.5%," Mr Jessop said.

The MPC announcement is due on Thursday.

The Bank raised the interest rate by its highest single amount in August at 0.5% - double its usual increment of 0.25%.

Modupe Adegbembo, an economist at AXA Investment Managers, felt the Bank was likely to raise the rate by 0.75% next week.

She told the Times: "Rising core inflation, continued tightening in the labour market and a consideration of sterling weakness will see the MPC step up their pace of tightening. The risk of a smaller 50-basis-point move in September remains and the easing of inflation will keep the option firmly on the table."

A price cap for household energy bills from October for two years will help to bring down headline inflation rates substantially, according to economists who expect headline inflation to peak at about 11% this autumn and to fall back next year.

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