Annual consumer price inflation fell further to 1.8% in August but the old retail price measure rebounded to 4.1%. The gap between the two is the largest since September 2000. The recent widening mainly reflects accelerating mortgage interest costs, which are included in the RPI but not CPI. Mortgage bills rose by 30% in the year to August.

On our calculations the average interest rate on outstanding mortgages stood at 6.0% in August, up from 5.3% a year before. Based on currently quoted rates and the large number of borrowers needing to refinance expiring fixed rate deals, the average rate is likely to reach over 6.5% by early 2008 – see chart.

The surge in mortgage bills will be a significant drag on consumer spending but may result in RPI inflation remaining above 4% going into 2008. With the labour market tightening recently, the MPC will be wary of a compensating pick-up in wage settlements when the pay round kicks off early next year.

Some economists are starting to talk about rate cuts before year-end but I think the MPC is on hold for the foreseeable future.