HIGHER council tax bills meant the underlying rate of inflation remained well above the Government's 2.5 per cent target during last month.

The rise in housing costs offset falls in petrol prices as the annual rate, which excludes mortgage interest payments, remained unchanged at three per cent.

Inflation has been above 2.5 per cent for six months in a row, including the past three at three per cent. It was last higher in May 1998, when the figure reached 3.2 per cent.

Headline inflation, which includes mortgage payments, was also unchanged at 3.1 per cent.

Yesterday's report from the Office for National Statistics (ONS) shows the largest upward effect of inflation came from housing.

This was mainly due to higher council tax and rates, which the ONS said was 12 per cent higher than a year earlier.

Rises in water charges were also greater than last year and helped further offset the benefits of rents and house depreciation.

Other upward effects came from duty increases on tobacco in the Budget and the price of fresh vegetables compared with the falls of the previous year.

An increase in Opec's oil production led to falling petrol and oil prices last month, in contrast with large increases a year earlier.

Economists believe the fall in petrol prices, coupled with weaker house price growth, will result in an easing of inflation during the coming months.