British inflation fails to slow as house prices jump

British inflation was higher than expected in September and house prices posted their biggest rise in almost three years in August, adding to scepticism about how long the central bank can hold down interest rates.

Annual consumer price inflation was unchanged from August according to the Office for National Statistics data today, defying forecasts for a tick-down to 2.6 percent.

British government bond prices fell further after the release, lifting benchmark yields - a proxy for market interest rate bets - to a three-week high.

However, separate official data published today showed that annual factory gate inflation slowed sharply in September, pointing to an easing in pipeline price pressures.

“With house prices continuing to rise ... and tomorrow’s labour report set to show ongoing job gains, we continue to look for an early 2015 rate hike,” said ING economist James Knightley.

In August the central bank pledged not to raise borrowing costs before Britain’s unemployment falls to 7 per cent - something the bank forecasts will take three years - unless inflation threatens to get out of control.

Bank of England policymaker Martin Weale reiterated his concerns that ‘forward guidance’ policies could stoke inflation expectations

Data due tomorrow is expected to show the jobless rate remained at 7.7 per cent in August.

An increase in air fares did most to boost growth in consumer prices, while the main downward pressure on inflation came from motor fuels.

As a result, core consumer price inflation - which includes air fares but excludes energy costs - rose to 2.2 per cent.

The statistics office said house prices rose 3.8 per cent in the year to August, the fastest rise since October 2010.

House prices are likely to get a further boost from the government’s mortgage guarantee scheme, launched last week. Critics fear the latest phase of the Help to Buy programme will result in another housing bubble rather than more home building.

British inflation has persistently exceeded wage growth, which is running at around 1 percent. Last week British energy supplier SSE inflamed a political row over falling living standards when it raised prices by an average of 8.2 per cent.

ING’s Knightley noted that utility prices could rise further in coming months, keeping inflation well above the Bank of England’s 2 per cent target.

But other economists supported the central bank’s view that domestic inflation pressures remain subdued and the economy has plenty of scope to grow.

Reuters