HIGHER-than-expected inflation figures have increased the likelihood of a rise in interest rates next month.

Analysts were braced for annual price growth to fall in December, but were forced to revise their outlook after the Consumer Prices Index (CPI) remained unchanged at 1.3 per cent.

It had been thought that a lower figure would have deterred the Bank of England's monetary policy committee from lifting rates to four per cent next month.

But Bank of England Governor Mervyn King said there would be no loosening of monetary policy in the wake of a change in the way inflation was measured.

He told business leaders in Birmingham that wage rises and the pricing of products should also be unaffected by the switch to the Consumer Prices Index (CPI) last month.

Inflation, based on the new CPI measure, is still a long way from the Government's target of two per cent.

The City will look at data on retail sales and GDP on Friday to provide further indications of the direction of interest rates.

David Page, a senior economist at stockbrokers Investec, said: "If those figures are strong enough to convince the Bank that the economy is growing at a fast enough pace to warrant another rate hike, then the CPI figures will not stop them."

The CPI, which differs from the Retail Price Index because of the absence of housing and council tax costs, was last lower in June, when the annual rate fell to 1.1 per cent.

The Treasury has adopted CPI, which is the preferred index in Europe, following a recommendation by the Chancellor.