Fall in mortgage rate cuts inflation to 3%

FALLS in mortgage rates cut the annual rate of inflation to 3 per cent last month - the lowest since October 1986 - and may drive the rate towards 2 per cent in the near future.

The impact of recently announced reductions in mortgage rates, which has yet to feed into the Retail Price Index, should further dampen upward pressures on the index in December and January. That should push inflation down towards rates not seen since the 1960s, apart from a brief period in 1986.

The fall in November inflation is the first since August, when the rate steadied at 3.6 per cent for three months in succession.

Excluding the impact of mortgage interest rates, the underlying inflation rate dropped to 3.6 per cent, the lowest since February 1988, from 3.8 per cent in October.

That brings the rate well within the Chancellor's 1-4 per cent target range. Norman Lamont said yesterday that November's inflation rate was 'very welcome news' and the Treasury emphasised that underlying inflation was below its German equivalent, which is running at 3.7 per cent and expected to top 4 per cent by January. The latest underlying inflation rate compares with a European Community average of 4 per cent in October.

But further reductions in the underlying rate of inflation - which the Government has made an explicit goal of policy - may prove more difficult to achieve than falls in the headline rate. Some analysts are worried about the impact of last September's devaluation of the pound feeding through into food prices. The consequent devaluation of the 'green' pound - which determines prices of food from the European Community - is expected to take effect in January. In addition, the council tax, to be introduced in April to replace the poll tax, could also push up underlying inflation.

The Treasury's latest compilation of independent economic forecasts shows that on average both City and outside forecasters predict the underlying rate will decisively breach the top end of the Chancellor's target range by the fourth quarter of 1993.

Moreover, the RPI has yet to reflect the impact of sterling's ejection from the European exchange rate mechanism, which resulted in a 15 per cent devaluation.

During November, prices actually fell by 0.1 per cent. In addition to falling mortgage rates, lower food prices, pre-Christmas discounts on alcoholic drink and clothing and footwear, as well as declines in second-hand car prices, all contributed to ebbing inflation pressures.

Upward pressures on prices were muted: petrol prices rose and there were higher prices for tobacco, some household goods and catering services.

In the next two months prices for some seasonal foods are expected to increase, although fruit and vegetable prices will probably remain low. Price movements for non-seasonal foods are expected to be mixed while prices of alcoholic drinks should fall with increased Christmas discounts.

The recent fall in petrol prices of 14p a gallon is also likely to curtail inflation pressures in the next two months. Further sales of household goods are expected while a scheduled fall in gas prices will depress fuel and lighting costs.