This was the lowest rate for underlying inflation - the retail price index excluding mortgage interest payments - since March 1988. Since records of this measure first began in 1975, a low point of 3.1 per cent was set in May 1986 after a collapse in oil prices.
Despite the drop, hopes of another cut in interest rates appeared to rest on the underlying rate falling within the 1-4 per cent target after Norman Lamont and John Major insisted that no risks would be taken with inflation. The underlying rate is expected to slip below Mr Lamont's ceiling in the next few months, but upward pressure stemming from the impact of devaluation could halt or even reverse that trend next year.
Yesterday morning, however, hopes briefly mounted that rates would be cut, following leaks of the Halifax Building Society report showing a very sharp fall in house prices in September.
Although the Chancellor has placed changes in house prices inside the cocktail of indicators guiding monetary policy, it seemed yesterday that the market gave too much credence to an automatic link between a movement in one indicator, such as house prices, and an imminent cut in rates.
Economists said yesterday's reaction was an indication of the confusion created by replacing sterling's value inside the ERM with a wide array of indicators whose weight in determining interest rate changes is largely unknown. The FT-SE 100 Index gave up most of its gains to end just 2.4 points higher at 2,541.2. But hopes that German rates would soon be cut helped sterling to recover a further 4.59 pfennigs to DM2.5169.
Otmar Issing, a member of the Bundesbank directorate, aided sentiment when he joined other members of the German central bank's policy-making council in playing down the significance of surging money supply growth.
The headline rate of inflation meanwhile steadied at 3.6 per cent after the RPI rose 0.4 points during the month. Lower food prices and motoring costs were more than offset by a recovery in prices for clothing and household goods, as deep price discounts during the summer came to an end and new stocks went on display. Prices of leisure services, including football matches and evening classes, increased, suggesting that deflationary pressures were not as widespread as the Government had assumed. But there was no indication that sterling's devaluation last month had begun to push prices higher.
Upward pressure on inflation from food and other prices this month and next may be offset by recent cuts in mortgage rates. But a fall in mortgage rates in October 1991, which has flattered the annual rate of inflation, will fall out of the annual comparison this month.Reuse content