SHARPLY higher retail prices of clothing and footwear detailed in latest British inflation figures yesterday were quickly interpreted in the City as the prelude of more widespread inflationary pressures leading to increased interest rates next year.

Overall, headline Retail Price Index inflation was unchanged last month at 2.1 per cent and the underlying inflation rate edged up from 2.8 per cent to 2.9 percent. But the detailed inflation figures reveal that clothing and footwear prices soared as much as 5.2 per cent offset by a 5.8 per cent plunge in seasonal food costs.

The 5.2 per cent increase in clothing and footwear prices reflects moves by retailers to restore profit margins on the back of strong growth in consumer spending seen in recent months. Previously, price hikes to lift margins have failed to hold and retailers have returned to price discounting to maintain sales. This time, though, consumer demand may have recovered sufficiently for higher prices to stick - and if clothing and footwear can sell on higher prices, so too will a gamut of consumer products.

On yesterday's inflation data, Chancellor of the Exchequer, Mr Kenneth Clarke, is unlikely to reduce British bank base rates any further from their present level of 5.75 per cent at the time of his annual Budget late next month. Although he may be able to avoid any rate increase in front of the general election to be held before next May, the City's futures markets are now predicting an increase in base rates to 6.65 per cent by next year.