UPDATE 2-Venezuela October inflation highest in 16 months

(Adds analysts' reaction, political background, sector data)

By Saul Hudson

CARACAS, Nov 1 (Reuters) - Venezuela's consumer prices rose by 2.4 percent in October, reaching the highest level in 16 months for the OPEC nation and topping expectations, the central bank said on Thursday.

Inflation in the 12 months to the end of October reached 17.2 percent, the highest rate in Latin America and a worrying sign for Wall Street of an overheating economy as well as a political challenge for leftist President Hugo Chavez.

October inflation was up from a 1.3 percent gain in September. Economic analysts surveyed by Reuters had on average forecast consumer prices would rise 1.6 percent in October due to high government spending, excessive liquidity and surging consumer demand as well as a depreciating currency on the unofficial market.

The central bank said the jump came against the backdrop of tax hikes on cigarettes and alcohol, an imminent new levy on financial transactions that economists say will increase consumers' costs, and decreed rises in prices for some foodstuffs whose prices are controlled by the government.

October's inflation was led by prices for tobacco and alcoholic drinks that leaped 9.2 percent and for food and other drinks that spiked 4.1 percent.

Despite the high figures, economists say official inflation figures increasingly underestimate reality because they are in part based on regulated prices for goods like milk and eggs rather than the higher prices consumers pay on the street due to periodic product shortages.

The shortages have been a lightning rod for opposition criticism of Chavez's socialist economic policies as he faces a major political test in December to win a referendum allowing him to scrap presidential term limits.

The opposition says Chavez, an ally of Cuban leader Fidel Castro, is turning the major oil exporter into another Communist country.

WORSE TO COME?

Calling the October figure "more grim inflation news from Venezuela," Informa Global Markets, a financial information analysis company, said in a research note, "Chavez's urban regeneration policies and high government spending, liquidity and consumer demand are the main catalysts behind elevated ... readings."

Inflation in October last year was 0.7 percent VEECI04.

In the first 10 months of this year inflation was 13.6 percent, already higher than the government's goal of 12 percent inflation for the year.

The central bank published inflation data on its Web site (here).

October's inflation was the highest monthly figure since July 2006, when consumer prices also rose 2.4 percent.