Inflation rise follows year of living cheaply

Inflation dropped to its lowest level for 30 years in 1999 despite a booming economy. Official figures published yesterday showed mortgage rate increases following November's base rate rise forced the annual inflation rate up to 1.8% in December from the previous month's 1.4%.

That left the average for 1999 at 1.5%, the lowest since 1960, said the office for national statistics. The government's preferred inflation measure, which strips out mortgage rates, stood at 2.2% last month, the same as in November. The annual average was 2.3%.

The Bank of England is required by the treasury to limit underlying inflation to 2.5%. Since it has been below target for nine months in a row, some City economists are questioning the assumption that interest rates will need to rise from 5.75%.

"We have a housing boom, oil prices up 17% and tobacco up 10% but inflation is still below target. That is quite some thing," said Darren Winder, analyst for Warburg Dillon Read.

On the European Union measure of prices, excluding housing, UK inflation fell to 1.2% last month from 1.3% - joint lowest with Sweden.

British Chambers of Commerce said yesterday there were already signs that the economy was slowing in response to higher interest rates. Business growth has levelled off, and export orders remained fragile in the last quarter.