By Nathan Gill and Sebastian Boyd

     Nov. 5 (Bloomberg) — Chile’s annual inflation rate rose to a 14-year high in October, led by rising costs for food and transportation, increasing pressure on policy makers to raise interest rates this month.

     Consumer prices jumped 9.9 percent last month from the same month a year earlier, the fastest pace since September 1994, the National Statistics Institute said today. The median forecast in a Bloomberg survey of 18 economists estimated that annual inflation would accelerate to 9.5 percent.

     Today’s inflation report probably limits the central bank’s room for maneuver at next week’s policy meeting, where the central bank must choose to pause for a second month or raise interest rates for the sixth time in 2008. Annual inflation has been running three times faster than the bank’s target since May.

     “This will greatly complicate the outlook for monetary policy,” Rafael de la Fuente, a senior economist at BNP Paribras SA in New York, said today in a note to clients.

    Following the agency’s publication of today’s inflation report, the central bank reported that the country’s economy expanded 5.5 percent in September from the same month a year earlier, more than forecast by economists in a Bloomberg survey.

     Central bank President Jose De Gregorio, speaking after the growth and inflation reports were published, said that slowing domestic demand may help contain inflation and that the bank needed more information before its next interest rate decision.

                             `Danger’

     De Gregorio’s comments echoed those made by the bank’s board at its Oct. 9 meeting, citing “uncertainty surrounding the global economy and its impact on projected inflation” as the reason to pause, according to the minutes of the meeting.

     Policy makers kept their benchmark interest rate at a nine-year high of 8.25 percent last month, and next meet Nov. 13.

     Economists such as Alberto Ramos of Goldman Sachs Group Inc. argue that today’s price and growth reports should help persuade policy makers to resume interest rate increases.

     “The central bank should focus on inflation and not pay as much attention to the global economic backdrop,” said Ramos by phone from New York today. “Inflation is a clear and present danger to the economy and that’s what they have to tackle.”

                            `Pressure’

     Consumer prices rose 0.9 percent in October, faster than the 0.6 percent median forecast in a Bloomberg survey of 21 economists, led by a 1.6 percent gain in food and beverage costs and a 0.9 percent rise in transportation prices.

     The price of fruits and vegetables jumped the most in October from a month earlier. The price of tomatoes rose 45 percent, bananas were up 24 percent and potatoes increased 17 percent last month, the statistics institute said.

     “They have tolerated inflation for far too long,” Ramos said. “They should be more proactive in forcing inflation down, and if other forces help, then they can ease faster.”

     South America’s fifth-largest economy expanded more than economists expected in September, led by industrial activity and wholesale trade, the central bank said today on its Web site.

     The median estimate of 20 economists surveyed by Bloomberg predicted 4.9 percent growth from the same month a year earlier. A statistics agency report published Oct. 30 showed output also expanded more than expected by economists in the same month.

     “The economy is rebounding faster and higher than we were expecting,” said Pedro Tuesta, a senior economist at 4Cast Inc, by phone from Washington D.C. today. “This, together with inflation numbers, will pressure the bank.”

     Tuesta expects the bank to raise interest rates by a quarter- to half-point in the first three months of 2009.

     The peso strengthened for a third day, rising 2.1 percent to 632.44 pesos per dollar at 12:41 p.m. New York time.