UK price inflation hits 3.7%
Better-than-expected inflation figures were overshadowed today when a separate measure used to determine pay rises and pensions hit an eight-year high.
Economists warned that the Retail Prices Index (RPI) figure of 3.7% for inflation in October could lead to an explosion of wage growth next year.
It is feared that rapidly rising wages could put pressure on the now more commonly used measure of inflation - the Consumer Prices Index (CPI) - which was unchanged at 2.4% last month.
The CPI reading was below the 2.6% expected by economists and offered the Bank of England hope that its decision to raise interest rates in August and again last week was bringing inflation back under control.
The Bank's Monetary Policy Committee (MPC) responsible for interest rates will also be watching the RPI figure closely as its impact on wages could drive CPI higher.
Chancellor Gordon Brown has called for public sector wage growth to be capped in line with the Treasury's CPI inflation target of 2%.
However, unions are calling for a larger increase as they look at RPI as a guide to the increasing cost of living.
CPI does not include housing costs such as mortgage interest repayments, council tax, building insurance and estate agents' fees, whereas RPI does.
Howard Archer, chief UK economist at Global Insight, said: "The unexpected stabilisation in consumer price inflation is very good news for the Bank of England, and obviously reduces the likelihood of another interest rate hike in early 2007."
He added: "The rise in RPI inflation to an eight-year high of 3.7% in October, up from 2.2% at the end of 2005, maintains the risk that wage settlements could move significantly higher in the 2007 pay rounds, given that many pay deals are still based on this inflation measure.
"If wage settlements do move higher, the Bank of England will not hesitate in pushing interest rates up further in 2007.
"On balance, the October inflation rate reinforces our belief that interest rates are set to stay at 5% for some considerable time, but we would certainly not yet rule out another 25 basis point hike around next February."
CPI was introduced by the Chancellor in December 2003 as the measure of inflation to be used when the Bank sets interest rates, although Bank of England governor Mervyn King recently called for housing costs to be included in CPI.
The gap between CPI and RPI inflation hit its widest level for 18 months in October, the Office for National Statistics (ONS) said today.
Rising housing costs pushed RPI inflation up from 3.6% in September to 3.7% last month - its highest level since May 1998.
