By David Milliken and Andy Bruce
LONDON (Reuters) -British consumer price inflation (CPI) held at an 18-month low of 6.7% in September, official data showed on Wednesday, bucking economists' expectations for a further decline and raising the possibility of a further rise in interest rates.
The Bank of England is still expected by financial markets to leave interest rates at 5.25% on Nov. 2, having kept them on hold in September following an unexpected drop in the August inflation rate the day before it announced its decision.
But sterling climbed following Wednesday's figures from the Office for National Statistics. These showed that a rise in fuel prices between August and September put upward pressure on the annual CPI rate, which economists had expected to drop to 6.6%.
"Progress in bringing inflation down is proving slow, with the UK generating higher levels of inflation than any other major industrialised nation," 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," he added.
Wednesday's data showed core inflation - which excludes volatile food, energy, alcohol and tobacco prices and is sometimes seen as giving a better guide to underlying price trends - fell less than expected to 6.1% in September from August's 6.2%.
Services price inflation - another CPI component the BoE studies - rose to 6.9% in September from 6.8%.
British consumer price inflation hit a 41-year high of 11.1% in October 2022 after European energy prices soared following Russia's invasion of Ukraine, adding to pressures caused by supply chain difficulties and labour shortages following the COVID-19 pandemic.
In its last set of forecasts in August, the BoE predicted inflation would stay above its 2% target until early 2025.
Britain's government is keenly eyeing inflation too, after Prime Minister Rishi Sunak pledged to halve it at the start of this year, and many households have seen their standard of living fall as wages have struggled to keep up with prices.
"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.
British consumer price inflation remains the highest in the Group of Seven advanced nations, with France and Italy the nearest with rates of 5.7% and 5.6% respectively for September.
Producer prices - which represents what manufacturers charge wholesalers and retailers - fell by an annual 0.1% in September after a 0.5% annual drop in August.
(Editing by Bernadette Baum and Toby Chopra)
