Inflation falls slightly

Britain's underlying rate of inflation unexpectedly fell by 0.1% to 2.7% in October from the month before, helped by a slower increase in house prices, official figures disclosed today.

The Office for National Statistics (ONS) said underlying inflation - which strips out volatile mortgage interest payments - was the slowest since January. City economists had expected the rate to stay at 2.8%. Cheaper foreign holidays were also responsible for the fall in inflation, the ONS said, with prices for most European holiday destinations falling this year in contrast to price rises a year ago.

"This is not a bad result. If anything, this might be marginally supportive of the idea that maybe the MPC [monetary policy committee] will keep interest rates unchanged in December," Adam Chester, an economist at Halifax, told Reuters.

The Bank of England earlier this month raised interest rates from their 48-year low by 0.25% to 3.75%, their first upward move in almost four years. City economists are now debating among themselves whether this month's move is the first in a series, or whether the Bank will desist from any more rate rises.

Some analysts believe the cost of borrowing will rise to 5% or 5.5% next year, a notion that horrifies manufacturing companies as they struggle to climb out of the worst slump in the manufacturing sector for a decade.

The release of minutes of this month's MPC meeting should shed some light on the strength of feeling for further monetary tightening among the nine MPC members.

Economists will be particularly curious to see whether any members argued in favour of a 0.5% rise rather than the 0.25% agreed, which could herald further monetary tightening. The Bank has become increasingly worried at the renewed pickup in house prices and the build-up of household debt to record levels.

Earlier this week, embattled manufacturers received some intellectual support for their case against higher borrowing costs. The Ernst & Young Item Club, a respected economic forecaster, which uses the same forecasting model as the Treasury, said the Bank raised rates too soon and warned that the prospect of a further rise could "choke the life of the fragile economic recovery".

October's underlying inflation rate remained above the Treasury target of 2.5% for the 12th month running. The overall headline rate of inflation, which includes mortgage payments, fell 0.2% from September to 2.6% last month, the smallest rise in almost a year.

The harmonised index of consumer prices (HICP), which excludes house prices and council tax, remained steady at just 1.4% for the third month running. The Bank will have to switch in January to targeting HICP and Gordon Brown, the chancellor, will announce in his pre-budget report on December 10 what the new target will be. Reuters reports that it will be 2%.