Inflation and public borrowing add to budget 2011 headaches By Larry Elliott

• Consumer price index hits 4.4% for February
• Public sector net borrowing for February at £10.3bn
• Hopes dashed of big cut in deficit
• News increases chance of cautious budget package

                                                                                                       Photograph: Oli Scarff/Getty Images

2011 budget giveaways from George Osborne are unlikely after high inflation and public borrowing figures.

 George Osborne was handed a double dose of unwelcome pre-budget news on Tuesday when official figures showed inflation leaping to 4.4% and public borrowing hit its highest February level since modern records began in 1993.  

 With the chancellor putting the finishing touches to his second package of fiscal measures, the rise in inflation put additional pressure on the Bank of England to raise interest rates while the deterioration in the public finances put paid to City hopes that borrowing in 2010-11 would significantly undershoot the government's £148bn target.

 The disappointing economic news increases the chances of a cautious package from Osborne on Wednesday. The setback to the public finances gives the chancellor even less scope for budget giveaways and he will see a tough fiscal stance as necessary to prevent the Bank from raising interest rates.

 Higher heating costs, the soaring price of oil and mark-ups from clothing and footwear retailers were mainly responsible for the increase in the consumer prices index measure of inflation from 4% to a 28-month high of 4.4%, according to the Office for National Statistics.

 Inflation has been rising steadily for the past year, consistently exceeding the government's 2% target and prompting a series of explanatory letters from Bank governor Mervyn King to the chancellor. Three members of the Bank's nine-strong monetary policy committee voted last month for higher interest rates to choke off price pressures in the economy.

 An alternative measure of the cost of living – the retail prices index – rose from 5.1% to 5.5% last month. The RPI is used by most wage bargainers as the benchmark for annual pay negotiations.

 Hetal Mehta, UK economist at Daiwa, said: "Inflation has jumped to its highest since October 2008, putting the Bank of England under even greater pressure to demonstrate its commitment to hitting its inflation target by hiking interest rates. And this pressure will no doubt intensify as higher commodity prices feed through in the coming months, taking inflation to around 5%."

 February's borrowing figures came as a shock to the City, which had been optimistic that overall borrowing for 2010-11 could come in at between £138bn and £140bn following strong tax receipts in January.

 But the ONS disclosed that public sector net borrowing last month stood at £10.3bn, more than £2bn higher than in February 2010 and well above the £8bn expected by the City.

 The government's preferred measure, PSNB excluding financial sector interventions, rose to £11.8bn. Both measures were the highest for the month of February since 1993. The ONS said the turnaround was explained by the unwinding of exceptional receipts for self-assessed income tax in January, the key month in the financial year for the payment of personal tax.

 For the financial year to date, the PSNB excluding financial interventions stood at £123.5bn compared to £136.6bn at the same point in the 2009/10 fiscal year.

©guardian.co.uk

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