The shock rise in inflation spells bad news for mortgages

A mere month after inflation undershot the Bank of England’s 2 per cent target, it’s back up again – in the sharpest spike in two years.

The Consumer Prices Index (CPI) jumped to 2.3 per cent in October, against 1.7 per cent the previous month, dealing a death blow to any hopes of a second straight interest rate cut in December.

Fuel prices were chiefly to blame for the sharpest increase in prices in 24 months. The rise in Ofgem’s energy price cap contrasted with a fall last year, pushing up the “housing and household services” category, which had been in negative territory in September.

But it was far from the only villain of the piece. Particularly worrying for the Bank of England will be the fact that the price of services rose by 5 per cent against 4.9 per cent. The rate-setting Monetary Policy Committee (MPC) has repeatedly voiced concerns about its stickiness.

Core inflation, excluding the ever volatile fuel, food, and tobacco, also rose to 3.3 per cent, another number which will be met with a frown in Threadneedle Street’s dusty halls. True, this didn’t come as a complete surprise. Economists had forecast a rise. So had the Bank. But the headline number was still above expectations and that is not good news.

The real worry is that may be more of this to come. Energy bills are set to rise again when OfGem next updates its cap. Retailers have been warning of price rises to follow Rachel Reeves’s tax-hiking Budget. They won’t start paying the new higher rates of employer national insurance contributions (NICs), which will also kick in at a lower threshold, until April. But you can bet that retail bosses will try to get their licks in early in the hopes of boosting their bottom lines. Christmas shopping is always a chore. This will only add to the discomfort.

Food price inflation was steady at 1.9 per cent, which is something. But remember, this means that food prices are still rising. If the supermarkets follow through on their threat to increase prices (and with Tesco forecast to face a £1bn increase in its costs you can take that as read) that looks set to change and not in a good way.

Sorry to have to write such a gloomy column. Unfortunately, these are the facts. Rachel Reeves and her colleagues in the Treasury surely have some thinking to do. The way they opted to address Britain’s fiscal crisis – all those “hard choices” they keep talking about – is already causing trouble and there will be more to come.

The silver lining amidst all these dark clouds is that, even with all this, it seems unlikely that price inflation will turn as nasty as it did when it hit 11.1 per cent, the highest peak scaled in 40 years. The MPC won’t allow it. It took an awful lot of heat as a consequence of its failure to see what was coming last time and deservedly so. That is what its members are paid to do, and paid well at that.

Those worthies were clearly bruised by the brickbats they took. The minutes of their meetings might be as dry as dust but you can still see it in the cautious tone struck. You can see it in the Bank’s reluctance to cut rates with the same enthusiasm as some of the world’s other central banks.

There are still some in the City who seem to believe that the Bank has scope to cut in December. Britain’s monetary policy remains restrictive. Small businesses are crying out for help.

Would-be homeowners have seen mortgages edging up again as the City’s interest rates swaps market – which governs the price of fixed-rate deals – has reacted to what has been going on. They could do with a break too – and the chances of a cut were priced at roughly 15 per cent at the time at writing. To my mind, however, even that is wildly optimistic.

If your mortgage is linked to base rates, you’re going to be out of luck – because they’re going to fall much more slowly than we thought. That means higher repayments and less in your pocket. If you’re on a fixed-rate deal, looking to remortgage or get a new one – or buy a new home – good deals are, I’m afraid, going to be harder to find.

The pound predictably surged on the latest data. A shallower path for rate cuts – now a certainty – makes sterling very attractive when compared to rival currencies. The dollar has been surging since Donald Trump won the US election, but the pound has been bearing up better than any of its rivals. That looks set to continue. It is a tough break for Britain’s exporters.

The realists in the City think we will have to wait until February for the Bank to move again. I concur. The next rate cut might not even come that quickly. Just a few short weeks ago I favoured a December cut to give the tortoise-like UK economy a much needed shot of espresso. But the game has changed.