1.4% inflation raises prospects of rates cut

A BIG drop in inflation and slower growth in high street spending yesterday boosted hopes that Kenneth Clarke will cut interest rates from 6 to 5 per cent in this month's Budget.

Inflation fell to 1.4 per cent last month from 1.8 per cent in September, according to the Central Statistical Office. Shop prices dropped by 0.1 per cent in the month, the first fall for the time of year since 1962.

Food and petrol prices fell, while prices for clothing, footwear and household goods did not jump as usual when new ranges arrived after the summer sales. Household goods prices have not fallen as sharply at this time of year since records began in the 1950s.

Inflation is expected to pick up as tax increases take effect and cuts in mortgage interest rates a year ago fall out of the annual comparison. But the rise could be limited by the nascent supermarket price war and by BP's 9p a gallon cut in petrol prices.

The Treasury's measure of underlying inflation - excluding mortgage interest payments - fell from 3.3 to 2.8 per cent, equalling its record low.

Evidence that the recovery in high street spending remains subdued came in separate figures showing a 0.1 per cent rise in the volume of sales last month, smaller than in the previous two months. Department store sales rose sharply as they took business from smaller shops. Sales of household goods jumped, clothing sales rose slightly and food sales fell.

Hugh Clark, of the British Retail Consortium, said the patchy performance in some sectors made retailers nervous about the fragility of consumer confidence: 'Retailers are generally worried about the effect on consumer spending of the Budget, which falls within the critical Christmas trading period.' City economists said the figures increased the chances that the Chancellor would raise taxes again on 30 November.

The City expects interest rates to be at least half a percentage point lower by the end of the year and would now not be surpised by a full point cut. Base rates have been cut in Budget week in nine of the past 13 years. 'Inflation is just not a problem,' said Keith Skeoch, of the City firm James Capel. 'This should signal that there will be no breach of the Government's 4 per cent ceiling for underlying inflation and that the headline rate will be subdued for most of next year.'

Senior Tory MPs are urging Mr Clarke to cut interest rates by 2 points. A cut is seen as an essential sweetener if the Chancellor imposes value-added tax on fuel in one go at 17.5 per cent, instead of in two stages, and for the cuts in public expenditure to be announced with the Budget. Harriet Harman, Labour's shadow Chief Secretary, said lower inflation reflected the economy's weakness.

Hopes of a base rate cut pushed shares higher, with the FT-SE index of 100 leading companies ending the day 22.5 points higher at 3,120. The pound closed lower against a basket of currencies. A sharp cut in Belgian interest rates, pointing to falls across Europe, put further pressure on Mr Clarke.

The move, following the Bundesbank's trimming of leading market rates this week, reflects Belgium's decision to freeze wages and cut social security spending.

Analysts also predicted the Bundesbank was likely to chop the discount rate from 5.75 per cent in December. No one was predicting a cut at today's Bundesbank council meeting, but the bank prefers to surprise markets to achieve the maximum impact.

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