Dearer services push up inflation

Rising prices in parts of the service sector sheltered from intense global competition pushed up the inflation rate for the first time since the spring last month, according to government figures published yesterday.

Sharp increases in the cost of insurance policies and foreign holidays were the driving force behind an increase in the annual inflation rate - more than offsetting price reductions across large swaths of the high street.

After hitting a 36-year-low of 1.1% in both August and September, the office for national statistics said the all-items rate of inflation rose to 1.2% in October, partly as a result of dearer homes loans.

The rate excluding mortgage interest payments was up from 2.1% to 2.2%, but still below its 2.5% target for the seventh month.

The Bank of England has raised interest rates twice in the past three months to prevent inflation rising above 2.5% over the next two years. But City analysts said the upward drift in inflation was unlikely to trigger a further tightening of monetary policy.

Michael Saunders, economist with Salomon Smith Barney Citibank, said that while the headline inflation rate was probably past its trough, the short-term prospect was for a further small decline in underlying inflation to around 2% over the next few months.

The detailed breakdown of inflation in the ONS's retail prices index showed that the supermarket price war is pushing down the cost of non-seasonal food.

Strong competition also led to falling prices for household goods such as electrical appliances, audio-visual equipment, clothing and footwear and chemist goods. As a result the inflation rate for goods stood at 0.4% last month, down from 0.5% in September.

Of the four components of goods inflation, food prices were 1.2% lower than a year ago, while the category called "other goods" -which includes clothes, household goods and leisure goods -recorded a record 2.5% fall. The impact of high-street competition was blunted by the above-inflation increases in tobacco and petrol duties.