Chancellor dines on a perfect cocktail of statistics

A week of key economic statistics kicked off yesterday with figures sure to please Kenneth Clarke, with news that inflation at the factory gate fell last month to its lowest for more than a decade. Separate survey results showed that high street sales grew at a slower pace in March.

This encouraging start will be followed by other statistics tomorrow and Thursday likely to show a further big drop in the number of people claiming unemployment benefit, lower-than-forecast government borrowing last financial year, and unchanged headline inflation. The cocktail could scarcely have turned out better for the Chancellor so close to the election date.

"Inflation can keep falling this year," said Jonathan Loynes, UK economist at HSBC Markets. He predicted that only a small post-election increase in interest rates would be necessary.

But other City economists stuck to the view that inflationary pressures would pick up later this year because of the strength of the economy outside manufacturing. "There is growing evidence of overheating in the service sector," said Richard Iley at Hoare Govett.

The Conservatives are certainly in danger of having missed their target of underlying retail price inflation of less than 2.5 per cent by the end of the parliament, although the April figure will not be published until after the election. Economists expect retail price inflation to fall below the target rate later this year.

Yesterday's figures showed that inflation further back in the pipeline, in prices paid by manufacturers for materials and charged at the factory gate, had fallen to the lowest since the mid-1980s. The strength of the pound in recent months has contributed to the decline.

Manufacturers' output prices climbed by only 1 per cent in the year to March, while ''core'' prices, excluding food, drink, tobacco and petroleum, were only 0.5 per cent higher year on year.

Input prices declined 0.5 per cent during March, taking their annual rate of decline from minus 6.6 per cent to minus 7.6 per cent. This was the biggest annual rate of decline in the cost of materials since oil prices dived in the mid-1980s, and was also driven by cheaper oil. Food and metals prices increased sharply last month.

"There is very little inflation in the pipeline in manufacturing," said Gerard Lyons, chief economist at DKB. "The worry will be inflation in the services sector."

A separate survey from the British Retail Consortium showed the annual growth in the value of sales on the high street on a like-for-like basis slipping to 3.7 per cent in March, the lowest since last April.

Unadjusted sales growth declined from 7.9 per cent to 7.1 per cent.

"Whilst sales in general have held up reasonably well, some sectors may have been adversely affected by uncertainty associated with the election," said Andrew Higginson, chairman of the BRC's economic affairs committee.

He said inflation was low in the retail sector, with especially noticeable downward pressure on food prices.

Furniture sales fell victim to pre-election uncertainty, especially big- ticket items. But good weather and the early Easter holiday had led to especially buoyant DIY sales.