RECORD oil prices and an increase in household energy bills pushed inflation up by 0.1 per cent to 1.2 per cent last month.

Motorists paid an average of 2p more for a litre of unleaded petrol and diesel last month after oil prices surged above $55 a barrel.

Rising crude prices also forced up the cost of domestic heating oil in a month when power suppliers raised gas and electricity prices, the Office for National Statistics (ONS) said.

The increase in the Consumer Prices Index (CPI) was broadly in line with City predictions, although some analysts had expected further discounting on the high street to cancel out the rise in fuel costs.

It means inflation remains well below the Government's target of two per cent over two years and is likely to dampen fears of further rises in interest rates.

The ONS said households were also paying more for package holidays last month compared with the discounted fares offered by operators a year ago.

Prices of fresh vegetables also increased, but their contribution to inflation was partially offset by the lower cost of cars and TV and video rentals.

Factory gate prices and the recent fall in the value of the pound pointed to higher inflation, even though the cost of importing consumer goods to the UK was continuing to fall.

The Bank of England said earlier this month that the risks to inflation were on the downside, despite oil prices hitting record levels.