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
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Content Writer - Global Financial Services

£25000 - £30000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Web Developer - PHP

£35000 - £40000 per annum: Recruitment Genius: From modest beginnings the comp...

Recruitment Genius: Field Sales Consultant - Financial Services - OTE £65,000

£15000 - £65000 per annum: Recruitment Genius: This is an exciting opportunity...

Recruitment Genius: Loan Underwriter

£18000 - £20000 per annum: Recruitment Genius: This is a fantastic opportunity...

Day In a Page

The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

The Silk Roads that trace civilisation

Long before the West rose to power, Asian pathways were connecting peoples and places
House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

The honours that shame Britain

Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
When it comes to street harassment, we need to talk about race

'When it comes to street harassment, we need to talk about race'

Why are black men living the stereotypes and why are we letting them get away with it?
International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

International Tap Festival comes to the UK

Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

'A subversive brothel keeper and Communist'

Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

BBC heads to the Californian coast

The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

Victorian fraudster who shook the Bank of England

Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

Car hacking scandal

Security designed to stop thieves hot-wiring almost every modern motor has been cracked
10 best placemats

Take your seat: 10 best placemats

Protect your table and dine in style with a bold new accessory
Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

Cook not the only one to be caught in The Oval mindwarp

Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

Can Benitez get the best out of Bale?

Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

Beijing witnesses new stage in the Jess and Kat rivalry

The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

Jeremy Corbyn interview: A shrewd operator desperate for power

His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

Isis executes Palmyra antiquities chief

Robert Fisk on the defender of the ancient city's past who was killed for protecting its future