Inflation has sharply increased amid higher gas prices, the weak sterling and a number of retailers finally reinstating the full VAT rate.

The consumer prices index (CPI) jumped from 3 per cent in February to 3.4 per cent in March, well above consensus estimates of 3.1 per cent.

Azad Zangana, Schroders European economist, says the rise is largely due to gas price falls in March 2009, which were not repeated this year.

‘It is worth noting that some major gas suppliers did cut their prices in April, and so we could see some downside surprise next month,’ he comments.

‘Though the gas price story is an important contributor to this morning's surprise, weakness in sterling also appears to be forcing firms to raise prices on their imported goods.’

Zangana says that that some retailers who had not fully passed on the cost of VAT being re-instated at 17.5 per cent did so in March, which would have also pushed up inflation.

The retail prices index (RPI), which includes housing costs, followed the same pattern as the CPI, rising by more than expected from 3.7 per cent to 4.4 per cent last month.

The spurt in inflation has raised questions over the timing of raising interest rates and Gordon Brown’s chances of being re-elected as prime minister.

Mark Bolsom, head of the UK trading desk at Travelex, says the markets want clear direction from policymakers on how they intend to deal with the inflationary pressure.

According to Zangana, this morning’s shock ‘marginally raises the likelihood of interest rates being raised sooner than the market anticipates’. 

He adds: ‘News of higher inflation may come as a blow for Gordon Brown's efforts for re-election. Higher inflation over the first quarter of this year may mean that GDP growth figures released on Friday may disappoint.’

James Hughes, chief economist at Black Swan Capital wealth management, has a bleaker outlook for the UK. ‘The UK economy has some very deep, fundamental problems that won’t be solved simply by installing a new government, and this sharp increase in UK inflation to 3.4 per cent is possibly just the start of an inevitable and unstoppable slide towards double-digit inflation and interest rates within the next few years,' he says.

The high inflation figures will come as a blow for savers. To stop their savings pot effectively eroding away, a basic-rate taxpayer needs to find an account paying 4.25 per cent, while a higher-rate taxpayer needs to find an account paying 5.64 per cent, according to Moneyfacts.co.uk.