Bank under fire as inflation falls to its lowest level since July 1963

INFLATION PLUNGED to a 36-year low last month, taking the City by surprise and sparking a chorus of criticism of the Bank of England's unexpected rate rise last week.

The headline rate fell to 1.1 per cent in August, its lowest since July 1963. Economists had expected the figure to remain unchanged from July's 1.3 per cent. The underlying rate, which the Bank uses when setting interest rates, also surprised pundits with a fall, dipping to 2.1 per cent from 2.2 per cent against forecasts of a 2.3 per cent rise.

But hopes that pressure for further rate rises had eased were dashed after separate figures showed US consumer spending surged in August, sending stock markets tumbling on both sides of the Atlantic.

Business and industry seized on the inflation data, saying they justified their pleas for rates to stay on hold at 5 per cent last week. Ian Fletcher, chief economic adviser at the British Chambers of Commerce, said the Bank should have concentrated on the state of the wider economy rather than on house prices.

"Today's figures show that there remains very tough competition on the high street and that seems to be keeping the lid on retail price inflation," he said.

Adair Turner, director-general of the Confederation of British Industry, said the rate rise looked "premature" in the light of depressed prices in the retail and manufacturing sectors and low wage settlements.

"The subsequent rise in exchange rates was a blow to manufacturing confidence and threatens to worsen the imbalance in the economy, with housing and related sectors performing strongly but export sectors remaining under severe pressure," he said.

But economists said the Bank was right to have raised rates now to ensure it hit its target in two years' time, saying August's fall was almost entirely due to the erratic food component.

Seasonal food prices fell 10..2 per cent in August, a sharp fall from July's 2.5 per cent deflation. Overall food prices fell 1.4 per cent, the steepest fall since March 1997. The Office for National Statistics said good harvests had pushed down prices, especially for potatoes. Goods inflation fell to 0.5 per cent, the lowest since records began in 1987, while services inflation was unabated at 3.6 per cent.

John O'Sullivan, an economist at Greenwich NatWest, said: "It is hard to argue that these numbers have huge policy implications." Ciaran Barr, of Deutsche Bank, added: "The Bank will have looked through this report... when raising rates last week, and are more concerned with the projected inflation rate in two years' time."

The Bank declined to comment on the data but a Treasury spokesman said the figures had been affected by seasonal factors. "They [the Bank] have made it very clear they are expected to look at the situation at least two years ahead and they have to take many different factors into account."

Financial markets responded to hopes that pressure for rate rises had eased. The pound fell a third of a cent to $1.6067 while bond yields fell for the first day in three. The FTSE 100 raced ahead more than 50 points immediately after the figures were released but closed down 0.9 per cent after it emerged that US consumers went on a spending spree in August.

US retail sales rose 1.2 per cent in August, outstripping an expected rise of 0.8 per cent. The figures showed consumer spending, which accounts for two-thirds of the economy, remains at high levels. That is likely to raise concerns that the Fed will have to hike rates again to slow economic growth.

Outlook, page 19

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power