Inflation is on the increase for first time since spring 1998

INFLATION ROSE for the first time in a year and a half last month, according to figures released yesterday. It ends the longest period without a rise since the Second World War.

A massive surge in car insurance drove service sector inflation to a six-year high, offsetting goods inflation which fell to an all-time low. In the first increase since May 1998, headline inflation rose to 1.2 per cent from 1.1 per cent in September, which had marked a 36-year low. The underlying measure, used by the Bank of England when setting interest rates, rose to 2.2 per cent from 2.1 per cent - the seventh month in a row it has remained below the 2.5 per cent target.

However, the rise was unexpected and analysts said it had shortened the odds for another interest rate hike, possibly as soon as February.

Detailed figures showed a widening divide between the goods and services sector. Goods inflation fell 0.4 per cent in the face of the high street price war, the lowest since records began in 1988. The cost of services rose 3.9 per cent, the fastest since January 1994.

The Office for National Statistics said the major pressure was car insurance premiums, which leapt a record 20.6 per cent in October. Petrol prices rose 12 per cent following rises in crude oil. The ONS said fierce competition had driven down high street prices. Non-seasonal food prices fell 0.8 per cent, its lowest since 1961.

Ciaran Barr, of Deutsche Bank, said: "The Bank ... will be concerned over the rise in services inflation. We look for a rate rise in the first quarter, most likely February."

John Edmonds, general secretary of the GMB union, said the figures threw doubt on this month's rate rise. "The Bank must explain why thousands of jobs are being sacrificed in what is clearly a phoney battle against phoney inflation."

Willem Buiter, a member of the Bank's rate committee, is to meet business leaders in Northampton today. Martyn Wylie, chief executive of the Northamptonshire Chamber of Commerce, said Professor Buiter faced "hard-hitting questions about the Bank's interest rate policy and its effect on businesses in the county".

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