Sharp rise in inflation kills off lingering rate cut hope

The prospect of a cut in interest rates evaporated yesterday, with the UK inflation rate in November rising sharply above its 2.5 per cent target to its highest level in four and a half years. However, economists said a rise in rates was unlikely with the manufacturing sector remaining so weak.

The figures came as the Chancellor of the Exchequer, Gordon Brown, warned against inflation-busting public-sector pay rises. "We will not take any risks with inflation," he told a Commons Treasury Select Committee.

Official figures for November showed the headline rate of inflation rose to 2.6 per cent, up from 2.1 per cent in October.

The key underlying rate of inflation, which excludes mortgage interest payments, jumped to 2.8 per cent from 2.3 per cent the previous month. It is only the third time the targeted rate of inflation has exceeded the 2.5 per cent level in three years. It is now expected to remain above that level for the whole of 2003.

The biggest cause of the rise in the headline rate was housing costs, as house prices continued to rise. The housing market was also a factor in the underlying rate, with a rise in the depreciation component ­ the amount homeowners need to spend to maintain their properties.

The sudden rise reduces the scope for the Bank of England's Monetary Policy Committee to cut rates despite the divergence in rates between the UK and those set by the European Central Bank.

"They would have to have a very good reason to cut rates again," said David Page, an economist at Investec Bank. "It would be politically awkward for the Bank to make another reduction at this point."

Danny Gabay, an UK economist at JP Morgan, said: "Today's data make the next move more likely to be up than down, but that any move may well be still some way off."

John Butler, at HSBC, said the rise above the Monetary Policy Committee's 2.5 per cent target rate "will not prove a temporary, one-off spike". But he said the MPC was unlikely to increase rates quickly after a period of almost three years when the rate has been below target. "It shows they are treating the target symmetrically," he said.

Other key factors in November's rise in retail prices included a sharp rise in motoring expenditure. Petrol prices remained unchanged this November compared with last year when they fell by 4p a litre. The price of cars also fell less than a year ago.

Clothing also contributed to the increase with "widespread price increases". Geoffrey Dicks, of RBS Financial Markets, said: "The main difference from our forecast came from clothing and footwear prices. Retailers are telling us that Christmas is off to a slow start ­ what do they expect if they hike prices like this?"

However, this price pressure may start to abate as evidence of weak high street trading mounts. New figures yesterday showed a fall in the number of people visiting shopping centres. The data from FootFall Research showed that in the week beginning 9 December, there was a 3.8 per cent drop in visitor numbers compared with last year.

"We are beginning to see the first signs of a slowdown," the FootFall business development director, Ian Wilcock, said. "Whether this is due to the bad weather last week, a general slowdown, or because of the position of Christmas on a Wednesday this year will become apparent next week."