Inflation creeps higher

UK inflation crept higher in May.

The headline rate rose to 3.1%, compared to 3.0% in April.

That was slightly higher than expected, and the highest since September 1998.

And the underlying rate, which excludes mortgage interest payments, rose to 2.0%, compared to 1.9% in April.

The Office for National Statistics said the main reason for the rise in the headline rate was the increased cost of mortgages, while the price of household goods continued to fall.

Other areas where prices are rising, putting pressure on inflation, include motoring costs, leisure spending, and personal services.

But prices are particularly low for furniture and electrical goods, as retailers have cut margins to keep customers. The late Easter may have also affected the timing of sales.

Utility prices also fell by 3.6% as the regulators put pressure on companies for price cuts.

Dual economy

Overall, the goods sector of the economy saw prices rise by only 0.2%, while the booming service sector saw average prices up by 3.4%.

However, service sector prices were growing previously at a rate of over 4%.

The high pound has been driving prices down in the goods sector, by keeping the price of imported goods lower, but this has little effect on services, most of which are only produced domestically.

Neil Parker, chief economist at the Royal Bank of Scotland, said that he was relieved that "the slowdown in service sector inflation, which has been the pressure point, was sustained."

But the disparity between the two parts of the economy, which is also reflected in figures for jobs and economic growth, is one of the main worries of the Bank of England as it attempts to manage inflation.

The European measure of inflation, the HICP, showed inflation even lower, at 0.5%, the lowest in the European Union. That index mainly measures the cost of goods.

Pressure on rates

The news will put more pressure on the Bank of England to consider raising interest rates, after four months in which they have remained unchanged at 6.0%.

The Bank is particularly concerned about wage inflation, which will be announced on Wednesday.

"The Monetary Policy Committee is worried that the economy is growing too swiftly. They are keeping an eye on average earnings, and are wary of wage pressures," said Rob Hayward of Bank of America.

However, the underlying rate of inflation is still below its target rate of 2.5%, as it has been for the last 14 months.

But there are fears that higher prices for oil, which recently touched $30 a barrel, will trigger a further rise in wholesale prices which could feed through to inflation.

Input prices to factories rose at a rate of 12.9% this month.