Inflation creeps upward

The increasing cost of mortgages pushed headline inflation last month up to 3.1%, its highest level since September 1998, government figures showed yesterday.

The office for national statistics said the largest upward effect on the all-items index came from changes in mortgage interest payments.

Base lending rates were cut in April last year and the downward impact of that, reducing mortgage payments on average by 0.8%, has now fallen out of the index.

However, yesterday's figures are unlikely to alarm the Bank of England's monetary policy committee. On the underlying measure, which excludes the mortgage interest costs, inflation ticked up to 2% from the previous month's record low of 1.9%. For the fourteenth month in a row, the underlying measure was safely below the government's 2.5% target.

"There appears to be little prospect of this undershoot ending any time soon," said Richard Iley, UK economist at ABN-Amro. "But the disinflationary impact of the strong pound continues to mask genuine inflationary pressures bubbling in the domestic economy."

The ONS said utility prices registered their biggest annual fall since records began in 1987, tumbling 3.6% from a year earlier thanks to the effects of regulators demanding price cuts from utilities companies.

"Despite all the talk about the buoyant consumer sector, there are few signs of inflation," said Rob Hayward at Bank of America.

"The monetary policy committee is worried that the economy is growing too swiftly. They are keeping an eye on average earnings, and are wary of wage pressures."

Britain has the lowest inflation in Europe, by a large margin. On the internationally comparable measure which excludes all housing costs, British inflation in April stood at just 0.6% - well below the EU average of 1.7%.

The figures for May showed that inflation in Britain dropped to 0.5%. In Ireland, the only other European country for which May figures were available, inflation climbed to 5.2%.