Rates poser as house prices rise and factory-gate inflation falls

House prices rose at their fastest pace for 18 months while the cost of goods leaving Britain's factories fell, according to official figures out yesterday that highlight the dilemma over interest rates.

However, the fall in producer-price inflation was driven by the drop in fuel costs and masked a "worrying" rise in so-called core industrial goods.

The average price of a property rose by 0.8 per cent in September to take the annual rate to 8 per cent from August's 7.4 per cent and the highest since March 2005.

The figures from the Department for Communities and Local Government showed that the recent boom in London had not rippled out through the UK.

All parts of the UK saw an acceleration in house price inflation. Since June, the east Midlands has seen an increase from 2 per cent to 5.1 per cent - proportionally faster than the rise in the capital from 5.5 to 9 per cent.

The figures pre-date the latest figures for October from Halifax and Nationwide that showed a further jump in prices.

"Mortgage activity and a shortage of supply in many areas means house prices could well see significant further increases," said Howard Archer, chief UK economist at Global Insight.

Asking prices - which point to selling prices several weeks ahead - have risen 1.3 per cent in the latest four weeks, according to an index from Home.co.uk.

However, analysts said that last week's quarter-point rise in interest rates could put the brake on the market. "As lenders react to the rate rise, we expect the housing market to begin to cool," said Milan Khatri, chief economist at the Royal Institution of Chartered Surveyors.

Kelvin Davidson, property economist at Capital Economics, pointed out that lenders were passing on the full impact of the rate rise. "Borrowers will feel the full brunt of November's rate rise, as well as the effects of a further increase in the new year," he said.

Factory-gate inflation slowed more than expected in October to its weakest rate in two and a half years as petrol prices fell sharply. But policymakers may be worried that core output prices, which exclude food, drink, tobacco and petrol, rose more than expected.

The Office for National Statistics said output prices fell 0.2 per cent in October, taking the annual rise to 1.7 per cent. But core output prices rose a seasonally adjusted 0.3 per cent, taking the annual rate of increase to 2.5 per cent.