Rate Fears as Housing Prices Push Inflation

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Byline: Nevill Boyd Maunsell

Hopes that the Bank of England may cut official interest rates next month took a knock yesterday with news that the housing boom is feeding through into inflation.

National Statistics reported that headline inflation jumped to 2.1 per cent over the 12 months to October from 1.7 per cent in September and just one per cent as recently as June. This was the steepest year-on-year increase since August last year.

Not counting mortgage interest payments, the measure of inflation chosen by Chancellor Gordon Brown for his 2.5 per cent inflation target, prices rose by 2.3 per cent, up from 2.1 per cent for the year to September.

This increase was driven largely by motoring costs.

Petrol prices barely changed last month, while they fell in October last year when crude oil prices were tumbling after shooting up briefly immediately after the terrorist attacks of September 11. Used car prices also fell by less than last year.

Headline inflation, the Retail Prices Index, traditionally used by wage bargainers, rose more sharply because larger numbers of homebuyers are paying interest on big mortgages taken out on the back of greatly inflated house prices.

This pushed up mortgage interest payments overall, even though interest rates were unchanged, while they fell last October as mortgage lenders passed on to their borrowers the Bank's official cut in September. 'We don't regard this as a big problem as it is down to base effects from last year when prices were distorted by the impact of the terrorist attacks on the US,' said Mr Glenn Davies, an economist at Credit Lyonnais. …