The headline rate of inflation jumped to a 16-month high of 2.6 per cent in April, reflecting the imposition of VAT on domestic fuel, higher council tax bills and the cut in mortgage tax relief. People on average need a 3 per cent rise in gross pay to compensate for inflation and Budget effects.
Kenneth Clarke, the Chancellor, said the country was on course for 'lasting, sustained recovery with no inflation'. But Labour's Harriet Harman said inflation was low only because the economy was weak: 'The Government has no strategy for strengthening the supply-side of the economy and ensuring sustainable growth.'
Separate figures from the Department of Employment showed an unexpectedly large fall in unemployment - 36,800 - but a rise in the rate of factory job cuts.
The City concluded that the combination of good news on inflation and the disappointing acceleration in earnings would persuade the Chancellor of the Exchequer and the Governor of the Bank of England to leave interest rates unchanged for now.
But the minutes of a meeting between the Chancellor and the Governor six weeks ago showed Mr Clarke was concerned that waiting for cast-iron evidence of the economy slowing in response to tax increases before he cut base rates again 'would risk delaying too long'.
The underlying rate of inflation - which excludes mortgage interest payments - fell from 2.4 per cent to 2.3 per cent in April, within the Government's 1 to 2.5 per cent target range for early 1997.
Household goods prices were lower than a year earlier for the first time since the 1960s. Inflation rates for catering, drink, tobacco, clothes, motoring, travel, leisure services and personal goods and services all slowed.
However, the Bank of England will be concerned that pay settlements and earnings growth will be pushed up as people try to offset the rise in headline inflation. Average earnings grew at an underlying 4 per cent in the year to March, according to the Department of Employment. But the rise was said to be largely the result of bonuses and overtime. Economists disagree whether earnings growth will slow or continue to rise.
'The fact that earnings figures are starting to creep up is a worrying factor which threatens to erode the competitiveness of UK firms in world markets and could jeopardise Britain's recovery,' said Robbie Gilbert, of the Confederation of British Industry.
Unemployment falls, page 41
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