(Adds detail, market reaction)
By David Milliken and Fiona Shaikh
LONDON, Oct 13 (Reuters) - British inflation fell more than expected to its lowest annual rate in five years but analysts said this probably represented the trough and price pressures would start rising again over the next few months.
The Office for National Statistics said on Tuesday CPI inflation fell to just 1.1 percent in September -- just over half the 2 percent target -- from 1.6 percent in August as last year's big rises in utility bills were not repeated.
Analysts had predicted a rate of 1.3 percent and the weaker than expected figures sent the pound down by around half a cent and gilts racing upwards as dealers bet that the Bank of England could still ease policy further.
"I think it's minded to expand the quantitative easing programme. This just provides the additional reason to do it," said Amit Kara, economist at UBS.
The central bank has cut interest rates to a record low of 0.5 percent and embarked on a 175 billion asset-buying programme, otherwise known as quantitative easing, in order to pump money into the recession-hit economy.
But other economists said background price pressures were building and there was now less chance of the BoE being forced to explain why inflation was so far below target, as it must if it goes below 1 percent.
"This is only a temporary move lower. Clothing prices and petrol prices jumped and we suspect that these components have further to rise," said James Knightley, economist at ING.
A planned rise in value-added tax to take effect on Jan. 1 would propel inflation higher early next year, as would rising oil prices and the weaker pound, he added.
Petrol prices were already exerting an upward impact on inflation in September as were the prices of second-hand cars.
For a graphic showing UK inflation and commodity prices, click here: http://graphics.thomsonreuters.com/109/UK_CMGBCP1009.gif
NOVEMBER KEY
Analysts said next month's new forecasts from the BoE would be key to determining whether the central bank would need to do more to support the economy.
A trio of surveys released earlier on Tuesday showed Britain's unprecedented monetary and fiscal stimulus has helped reverse a slide in house prices, buoyed retail sales and pushed the economy closer to recovery. [ID:nLC445016]
The British Retail Consortium said retail sales rose at their fastest annual pace in 5 months in September, figures from the British Chambers of Commerce showed the decline in manufacturing and services eased markedly in the third quarter and the Royal Institution of Chartered Surveyors suggested house prices are rising at their fastest pace in more than two years.
Retail price inflation, which includes more housing costs and is used as a benchmark for pay deals, eased less than expected to -1.4 percent from -1.3 percent, compared to economists' expectations of a drop to -1.5 percent.
The ONS said the biggest downward impact on consumer price inflation last month came from household services, principally gas and electricity bills, which were unchanged on the month but rose sharply a year ago.
Electricity, gas and other fuels fell 7.3 percent on the year, the biggest drop since the official series began in January 1997.
Goods prices were unchanged on the year, the weakest reading since May 2005, while services prices increased by the smallest amount since records began in 1997.
The Rossi index, which is used as a benchmark for state benefit rises, was up 1.8 percent on the year, compared with a rise of 6.3 percent in September 2008. (Writing by Sumeet Desai, editing by Mike Peacock)