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UK inflation stuck at highest level since May

A market trader packs up his stall in London November 13, 2012. REUTERS/Luke MacGregor
A market trader packs up his stall in London November 13, 2012. REUTERS/Luke MacGregor

By Olesya Dmitracova and William Schomberg

LONDON (Reuters) - Britain's inflation rate unexpectedly held steady for the fourth consecutive month in January but there was little respite for consumers as it remained at its highest level since May, official data showed on Tuesday.

Annual consumer price inflation stayed at 2.7 percent last month, the Office for National Statistics said, slightly below the 2.8 percent median forecast in a Reuters poll of economists.

It is the first time inflation has remained unchanged for four months since records began in 1996, the ONS said.

A let-up in the pressure on the strained budgets of British households may still be some way off. Some economists predict inflation will touch 3 percent in coming months.

"In terms of the consumer, it certainly means that the squeeze on real spending power remains very much in place but that's mitigated to an extent by employment having held up relatively well," said Victoria Clarke, an economist at Investec.

Financial markets were little changed by the data.

The Bank of England warned last week that inflation might remain above its 2 percent target for the next two years. It will publish its latest quarterly economic forecasts on Wednesday.

The biggest upward contribution to the annual rate in January came from an 8.5 percent rise in alcohol and tobacco prices. The main downward pressure came from slower rises in the prices of miscellaneous goods and services, such as money transfer fees, as well as clothes and shoes.

The ONS also said house prices rose 3.3 percent on the year in December - the largest increase since November 2010. In November 2012 they rose 2.2 percent.

The Bank of England last year launched a scheme to encourage lending by banks, the impact of which has so far been felt most in mortgages.

Persistently high inflation has restrained consumer spending - traditionally a key driver of economic growth in Britain - in recent years. It has also limited the scope for more government bond-buying by the central bank, part of its support for the economy.

Separate data released by the ONS showed that factory-gate inflation rose 2.0 percent on the year in January, the slowest since July. Input prices climbed 1.8 percent, the fastest since March last year and pushed up by domestic food prices, possibly a reflection of bad weather which hurt British crops.

Earlier this month, the British Retail Consortium found that shop prices inched up in January at their slowest annual pace in more than three years, driven by cheaper clothing and electrical goods.

(Editing by Hugh Lawson)

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