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Tuesday, November 16, 1999 Published at 14:31 GMT


Business: The Economy

UK inflation creeps up



Inflation in the UK rose slightly in October but was roughly in line with expectations.

The Office for National Statistics said the headline rate was 1.2%, up from 1.1% the previous month.

The key underlying inflation rate - which excludes mortgage interest payments - was 2.2%, compared to 2.1% in September. But it was still well below the government's target rate of 2.5%.

The monthly rise in the headline rate was 0.2%, while the underlying rate was up 0.1%.

The euro-zone measure of inflation - the EU harmonised index of consumer prices - was unchanged at 1.2%.

Last month, UK euro-zone inflation was exactly on the EU average - below Spain and Italy but above Germany and France.


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City analysts were expecting the October figures to show little change from September, when the headline rate was at a 36-year low.

Their reaction to the figures was to put the rise down to seasonal variations, although it was noted that the Bank of England would be disappointed by an upward movement, however small.

In its latest quarterly inflation report, published last week, the Bank forecast that inflation would fall further next year before climbing back up to the target level at the end of 2001.

Many analysts believe the Bank will still raise interest rates - base rate is currently 5.5% - to about 6% by early next year to choke off any build-up of inflationary pressures.

Influences

The main reason given for the rise in inflation was an increase in motoring costs, with both insurance premiums and petrol prices markedly higher.

The headline rate was also affected by mortgage lenders passing on part of the September rise in interest rates to homeowners.

Partially offsetting these influences were lower food and household goods costs resulting from intense competition in the retail sector.

There is concern among some economists about the widening gulf between inflation in the goods and services sectors, with the latter rising to its highest level since the beginning of 1994.

For example, in the past 12 months, the price of clothing and footwear has declined by 3.0% while the cost of leisure services - such as entertainment and holidays - has gone up 4.6%.


[ image:  ]

"The split between the two shows once again the extent to which the economy is split," said Barclays Capital UK economist Adam Law.

"Competitive pressures are such that goods inflation is non-existent but the same level of competition is not yet in evidence in the service sector," he said.

Philip Shaw of Investec described the data as "slightly disappointing".

"If you like, it's a warning shot - a sharp reminder to the markets that they have to look at all constituents of the Retail Price Index."



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