House prices help to push up inflation

Rising house prices helped to push up inflation last month, despite the biggest July drop in the cost of clothes and shoes for almost 50 years.

The headline inflation rate rose to 2.2 per cent in the 12 months to July, up from 2.1 per cent in June, though prices fell by 0.4 per cent between the two months, the first such drop since January.

The underlying inflation rate, which is the Government's preferred measure and excludes mortgage interest payments, remained stuck at 2.8 per cent, the same level as in May and June. Stripping away the effects of mortgage rates and indirect taxes, the Bank of England's preferred measure of inflation, the annual rate also increased slightly, from 2.3 per cent to 2.4 per cent.

Many economists are still predicting that inflation will slacken off towards the end of the year, but some suggested the Chancellor's target to bring the underlying rate down below 2.5 per cent by the next election was looking increasingly optimistic. Kevin Gardiner, an economist with investment bankers Morgan Stanley, explained: "It's looking more and more likely that the Government will fail to hit that target. We haven't got many months left before the end of this Parliament and along with yesterday's better-than-expected unemployment figures, it looks as though inflation may gradually pick up."

The inflation data follows Wednesday's release of minutes of July's monthly meeting between the Chancellor and the Governor of the Bank of England, which showed tough opposition by the Bank to further interest rate cuts as concern continued about inflationary risks. But there was little suggestion from yesterday's figures of an impending price explosion.

The impact of the increase in house prices was clear from the detailed breakdown of the figures, which showed housing costs rising by 0.4 per cent month on month, with house prices up 3 per cent compared with July 1995. The Office for National Statistics also said inflation had been stoked by the rise in the cost of postage stamps, and the fact that reductions in phone charges had not been as big as in 1995.

Inflationary pressures were dampened by heavy discounting in high street stores' summer sales, which helped contribute to the largest July fall in clothing and footwear prices since records began in 1948. The clothing and footwear index dropped by 4.9 per cent in July compared with June, with shoes particularly heavily discounted.

Seasonal food prices, which traditionally fall as summer produce comes into the shops, were 9.1 per cent lower in July than June, against a 6.6 per cent drop during the same period last year. One factor was a late, but abundant home-grown fruit crop, while this year's wetter summer weather put more vegetables on the shelves than during last summer's drought. There was little evidence of any further downwards pressure on beef prices from the mad cow disease scare, though the cost of lamb and pork rose substantially.

Though the inflationary outlook remains broadly flat, economists pointed to an increasing gap between the outlook for prices of goods and the cost of services, as consumer confidence improves. In July, the price of services sold by retailers, such as entertainment, catering, and rentals, went up at an annual rate of 4.3 per cent, the highest since March 1994. As a whole, services prices increased by 2.6 per cent in the year to July, the biggest rise since the spring of 1995.

Government statisticians said the outlook for prices so far this month was also flat, though there would be a boost from the recent cuts in mortgage rates by some lenders, and from reductions in electricity prices by three companies.