By David Milliken and Andy Bruce
LONDON (Reuters) -British consumer price inflation (CPI) unexpectedly held at 6.7% in September, remaining the highest of any major advanced economy and keeping alive the possibility of another rise in interest rates.
A rise in petrol prices between August and September was the main factor stopping a fall in the annual rate, the Office for National Statistics said on Wednesday.
But two other less volatile measures closely watched by the Bank of England (BoE) - core inflation and services prices - were also robust, which is likely to leave some policymakers worried about longer-term price pressures.
"Progress in bringing inflation down is proving slow," said Ian Stewart, chief economist at accountancy firm Deloitte. "The persistence of underlying inflation, and service price pressures, suggests that interest rates are likely to stay close to current levels for much of the next year."
Sterling rose after the data and British government bond prices fell, as financial markets judged another rate rise by the BoE is more likely than not - though not necessarily as soon Nov. 2, when the central bank announces its next decision.
September's data still leaves headline inflation below what the BoE forecast in early August and several economists said it was not enough of an upward surprise to prompt the BoE's Monetary Policy Committee (MPC) to resume its rate-tightening cycle.
"We expect the MPC to remain on hold this year, but to continue to push back against any rapid cuts," Morgan Stanley economist Bruna Skarica said, adding that she expected rate cuts to begin in May 2024 or slightly later.
Last month the BoE kept interest rates on hold for the first time since it started its tightening cycle in December 2021, following an unexpected fall in inflation in August and other weaker data.
The central bank's chief economist, Huw Pill, said last week that the question of further rate rises was "finely balanced" and Governor Andrew Bailey predicted future votes would be "tight", following on from September's 5-4 split.
STICKY UNDERLYING INFLATION
Britain's government is keenly eyeing inflation too, after Prime Minister Rishi Sunak pledged in January to halve it, and many households have seen their standard of living fall as wages have struggled to keep up with prices.
Food prices - a worry for many poorer households - were 12.1% higher in September than a year earlier.
"As we have seen across other G7 countries, inflation rarely falls in a straight line, but if we stick to our plan then we still expect it to keep falling this year," finance minister Jeremy Hunt said after the data.
Consumer prices in Britain have risen 17% in the past two years, an increase that would normally take almost a decade.
Wednesday's data showed core inflation fell less than expected to 6.1% in September from August's 6.2%. This measure excludes volatile food, energy, alcohol and tobacco prices and is often considered a better guide to longer-term price trends.
Services price inflation - another CPI component the BoE studies as it shows the impact of rising domestic labour costs on consumers - increased to 6.9% in September from 6.8%, driven by more expensive hotel rooms.
Prices charged by manufacturers - considered a good indicator of future inflation by some BoE policymakers - fell by an annual 0.1% in September after a 0.5% annual drop in August.
Raw data for the headline CPI came within a whisker of giving an inflation reading that would have been rounded down to the 6.6% rate expected by economists polled by Reuters.
CPI hit a 41-year high of 11.1% in October 2022 after European energy prices soared due to Russia's invasion of Ukraine, adding to pressures caused by supply chain difficulties and labour shortages following the COVID-19 pandemic.
September's rate of 6.7% is the joint-lowest, along with August, since the Russian invasion in February 2022.
In its last set of forecasts in August, the BoE predicted inflation would stay above its 2% target until early 2025.
Many economists expect a sharp drop in CPI in October, as household energy bills will no longer be compared against the much lower year-ago prices that were in place before a big rise in regulated tariffs in October 2022.
Dutch bank ING forecast British inflation would drop to 5% or lower in October and hold near that level for the rest of the year, assuming no significant further rise in oil prices.