Inflation in services adds to rate rise pressures

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INFLATION IN the services sector is showing signs of rapid acceleration, with the rise in prices charged by businessesreaching its highest for 30 months, according to a survey yesterday. Services account for two- thirds of the economy.

News of the ninth successive monthly jump in activity, bigger price increases and extensive staff shortages comes ahead of next week's Monetary Policy Committee meeting. "Plenty for the MPC to mull over," said Geoffrey Dicks, an economist at Greenwich NatWest. City experts are no longer convinced that possible Y2K computer problems will delay the next rise in UK interest rates into 2000.

The Chartered Institute of Purchasing and Supply (CIPS) reported a sharp increase in business activity in services last month. Preparations for the millennium gave a one-off boost to business, but underlying economic conditions were strong anyway, the survey said.

The index of business activity rose to 59.5 from 55.7, with the biggest rises in demand enjoyed by transport, communications and finance, which, along with hotels and catering, had built up a backlog.

An index over 50 signals expansion, and November's index was the highest since June 1997. The report said: "Signs that consumer demand was strengthening convinced many panel members that they were able to pass on at least part of the recent increases in costs on to their customers."

Those costs - mainly wages - rose by a touch less than in the previous month, but firms said working times and holiday pay laws had raised costs. The CIPS reported growing shortages of staff in a range of sectors, and temporary and contract staff were less available.

"This sector poses the key upside risk to the inflation outlook," warned Dharshini David of HSBC. Marian Bell of Royal Bank of Scotland said: "Interest rates probably need to rise another half point, but I don't think they'll do it this month."

The latest British Retail Consortium survey said prices of selected goods in Britain's shops were down by 1.2 per cent in the year to November.