Services sector dashes hope of inflation fall

A SURGE in inflation in the services sector last month dashed hopes of a drop in the headline rate of inflation, new figures showed yesterday.

A 13.1 per cent rise in car insurance sent services inflation motoring ahead from 3.3 per cent to 3.6 per cent - its highest rate since June 1994. The increase wiped out the impact of an unchanged goods inflation rate of 0.9 per cent to leave the headline rate at 1.3 per cent, the same as in June.

Core services inflation, excluding rent and utilities, rose to a nine- month high of 4.7 per cent, while core goods prices fell to a record low of minus 1.7 per cent.

Economists had expected a fall in the headline rate to 1.1 per cent, which would have been the lowest since July 1963. The Government's preferred rate excluding mortgage costs - against which the Bank of England sets interest rates - was unchanged at 2.2 per cent, in line with forecasts and still well below the 2.5 per cent target. The underlying rate, which excludes the impact of council tax, VAT and insurance taxes as well as mortgage costs, rose to 1.6 per cent from 1.5 per cent.

Economists said the Bank's Monetary Policy Committee was benefiting from the downward impact on goods inflation of low raw material costs and subdued import prices. "But the stubbornness of domestically generated price pressures in areas such as insurance will intensify concern among some MPC members over the outlook for inflation once these favourable external forces wear off," said Jonathan Loynes of HSBC.

The Bank's inflation report last week showed that the MPC was split three ways about the likely path of inflation over the next two years, with some forecasting that it would undershoot the target, others saying it would hit it and a third group predicting an overshoot.

The Engineering Employers' Federation said increases in engineers' pay were at historically low levels. Average rises in the three months to the end of July came in at 2.5 per cent - the same as the previous three months. One in five settlements were a pay freeze.

Separate figures from the Office for National Statistics showed there was a public sector net cash surplus of pounds 5.36bn in July. Economists had expected a sizeable surplus thanks to corporation and value-added tax receipts, and to larger income tax receipts due to self-assessment.

t Inflation in the United States rose by 0.3 per cent in July, in line with expectations, following two months of flat reading. The closely watched core figure rose by 0.2 per cent, against forecasts of 0.4 per cent.