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Last Updated: Tuesday, 12 December 2006, 11:03 GMT
UK inflation at near-decade high
Person filling up a car with petrol
Petrol prices are proving stubbornly high despite a dip in crude costs
UK inflation has accelerated to its highest level for almost a decade in November, increasing the chances of an interest rate rise early in 2007.

November's Consumer Price Index (CPI) jumped to 2.7%, from 2.4%, the Office for National Statistics (ONS) said. The monthly rate of inflation was 0.3%.

The RPI rate, which includes mortgage payments, rose to 3.9%.

Last week, the Bank of England kept rates on hold at 5%, after raising them twice in the preceding four months.

'Headed higher'

Howard Archer, of Global Insight, said he was sticking - for the moment - to a forecast that rates would remain there for some time.

But he warned: "The November inflation data will not be very well received at the Bank of England, and will undoubtedly fuel expectations that interest rates are headed higher in 2007."

Factors pushing up inflation this time around such as air travel can be very volatile
Philip Shaw, Investec

UK bonds fell on Tuesday's inflation news, signalling that many investors expected another interest rate increase in coming months.

ING strategist Rob Carnell said the figures would give some members of the Bank's rate-setting Monetary Policy Committee (MPC) more ammunition to argue for a further rate hike next year, perhaps as soon as February.

November's annual rate of inflation is the highest since the UK introduced the CPI as a measure of inflation in 1997, and was driven by an increase in transport costs and a smaller decline than expected in fuel and energy costs.

Another driver of price growth was an increase in the cost of goods such as CDs and DVDs.

Talking turkey

Consumer price growth is significantly above the Bank of England's 2% target.

The worry for many inflation-watchers is that there is a round of public sector wage negotiations due around the New Year that use the RPI figure as their base for talks and pay increases.

Any jump in wages could add further pressure to price growth, especially as the cost of household fuel bills have surged by almost a third during the past year, analysts said.

"Factors pushing up inflation this time around such as air travel can be very volatile," said Philip Shaw, chief economist at Investec.

"But with headline inflation continuing to rise, the MPC will keep a close eye on turn-of-the-year wage settlements."


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