Mounting inflationary pressures continue to threaten economic performance, according to accountants and business advisers BDO Stoy Hayward.
The latest BDO Business Trends Report says an upturn in UK economic growth, helped by increased consumer spending and a buoyant housing market, has boosted confidence across all sectors. But the main concern for firms in the next few months will be rising inflation.
Consumer prices rose by 0.6 per cent in April - the highest rate in five years - reflected in a dramatic increase in the BDO inflation index from 102.1 in April to 106.1 in May.
This consumer price jump combined with high oil prices means that inflation is likely to stay above the two per cent target for the rest of 2006.
While the Bank of England keeps a close eye on inflation, BDO Stoy Hayward expects the Monetary Policy Committee to keep rates on hold when it meets this Thursday, but predicts a rate rise later in the year if oil prices remain high.
Mr Kim Rayment, partner at BDO Stoy Hayward in Birmingham, said: "The most recent available data points to a possible interest rate rise at some point this year, however, businesses also need to prepare for potential future turmoil in the world economy following recent market fluctuations.
"If the dollar weakens further, it will affect UK exports, which could in turn weaken the British economy and hinder growth, leading to further uncertainty over the future of interest rates."
Douglas McWilliams, chief executive of the centre for economics and business research, added: "It is good to see UK growth improving, but inflationary pressures remain a blot on the horizon."