Rate cut odds lengthen

Prospects of an early cut in interest rates receded yesterday after official figures showed the cost of living last month rose at the fastest pace since April.

Underlying inflation crept up to an annual rate of 2.3% in October, from 2.1% in September, underpinned by buoyant house prices and rising motoring costs, according to the Office for National Statistics.

Evidence of mounting price pressures appeared to vindicate the caution of hawks on the Bank of England's nine-member rate-setting committee, which left borrowing costs on hold last week.

Unions and recession-hit manufacturers responded furiously to the no-change decision, but analysts said yesterday's jump in inflation - taking it close to the 2.5% target set by Gordon Brown - lengthened the odds on a rate cut.

"Today's data delivers a further blow to the already very slim possibility that the MPC would look to cut base rates at its December meeting," said Simon Rubinsohn, of City brokers Gerrard.

Mr Rubinsohn added, however, that since the MPC looks at inflation on a two-year horizon, a serious deterioration in economic prospects could still see them cutting rates - as the US Federal Reserve did last week - despite price pressures in the short term.

"A rise above the 2.5% inflation target will not necessarily prevent the authorities easing policy in the new year should consumer support for the economy begin to wane in response to either a flatter property market or the hike in national insurance contributions," Mr Rubinsohn said.

The Bank of England is due to present its latest projections for the economy - including the outlook for inflation - in its quarterly inflation report this morning.

One factor restraining the MPC from cutting rates has been the roaring housing market, and statisticians said yesterday that the largest upward effect on inflation had come from rising housing costs.

House prices are used by the ONS to estimate depreciation - the price of keeping a home up to scratch over time. With the year-on-year increase in the government's property price index at 16% - the highest since the series began in 1996 - the Office for National Statistics said depreciation had contributed +0.1 percentage points to the retail price index.

The cost of running a car was another factor underpinning the rise in the inflation rate, the ONS said, with the price of a litre of petrol flat this October, compared to reductions in prices a year ago. Repairs were 6% more costly.

University tuition fees also made an upward contribution to the cost of living. Statisticians explained that rising average earnings had reduced the percentage of families receiving financial help with their fees, and therefore put up the average cost of a degree.

Education costs were up 8.5% year on year, according to the internationally comparable HICP measure of inflation, which was also released yesterday.

HICP inflation for the UK stood at 1.4% last month, well below the EU average of 1.9% for September, the latest month for which data is available.

With inflation in the stagnant German economy at 1% in September, and little sign of resurgent demand to push up prices, the UK looks certain to have to cede its long-running distinction of being at the bottom of the eurozone inflation league.