Rate cut hope as house and fuel prices cool inflation

Hopes of a cut in UK interest rates were raised yesterday after government figures showed that falling petrol prices helped drive down inflation last month.

After going up in September during the fuel protests, pump prices declined last month according to the Office for Na tional Statistics, sending the headline rate of inflation down to 3.1%, from 3.3% in September.

The cooling housing market also contributed to lowering inflation, according to the ONS, as house prices, estate agents fees and contents insurance are all falling.

On the government's preferred measure, which ex cludes mortgage interest costs, inflation fell to 2% from 2.2% in September. The underlying rate has now been below the government's 2.5% target for 19 months.

Some City economists believe yesterday's figures signal that the Bank of England can safely cut interest rates, which have been on hold at 6% since February.

"These are undeniably good numbers for the gilt market," said David Brown, chief European economist at Bear Stearns. "They underline that inflation risks have receded for the Bank of England."

Inflation in the service sector fell to 3.1% in October, its lowest level for two and half years, according to the ONS. The divergence between services and goods inflation, where price pressures have been subdued has been a major concern for the Bank.

"The continuing decline in service sector inflation is particularly welcome," said Geoffrey Dicks, UK economist at the Royal Bank of Scotland.

However shoppers are getting less of a bargain on the high street where shops have offered smaller reductions in this year's autumn sales than in last year's.

The Bank will publish its quarterly inflation forecast tomorrow, a closely watched guide to the views of its key interest rate-setting committee. A forecast below 2.5% for inflation in two years time could signal that the committee is preparing to cut rates.