The latest data will help retail price inflation to reach its 2.5 per cent target later this year. City analysts said it would allow Kenneth Clarke, Chancellor of the Exchequer, scope for a pre-election cut in interest rates despite the mounting evidence that the economy is strengthening.
There were fresh signs yesterday of faster growth in retail sales. The year-on-year increase in the value of sales climbed to 6.9 per cent last month, according to the British Retail Consortium. Its survey of big stores showed particular strength in furniture and carpets, DIY, electrical goods and housewares.
Andrew Higginson, chairman of its economic affairs committee, said: "Sentiment in the industry is improving as consumer confidence strengthens and the housing market picks up."
Kevin Darlington, an economist at Hoare Govett, said: "The Chancellor knows weak cost pressures will give him a good enough case for a reduction in rates despite the faster growth."
The price paid by manufacturers for raw materials rose 0.3 per cent during August, but remained 2.2 per cent lower than a year earlier. There was no change in prices charged at the factory gate in the month. The year-on-year growth rate in "core" prices - excluding food, drink, tobacco and petrol - fell to 1.3 per cent, the lowest since November 1967.
Declining commodities prices lie behind the subdued input cost pressures. Although the oil price rose nearly 4 per cent during August, other prices fell.
The mini-recession in manufacturing earlier this year has also contributed to the downward trend in output price inflation, which will ripple further along the prices pipeline. The target measure of retail price inflation is expected to show a drop to 2.6 per cent in August when the figure is published on Thursday. Most economists expect inflation to remain low in the next six to nine months. However, some predict it will then start to climb above the Government's target.
Geoffrey Dicks at NatWest Markets said it would be harder to keep inflation low when costs had stopped falling and demand was strengthening.
Kevin Gardiner at Morgan Stanley argued yesterday's figures did not signal a favourable outlook beyond the next few months. "Manufacturing is only a quarter of the economy and inflation is a lagging indicator. We know that prices in services are a lot more buoyant," he said.
Figures on unemployment and earnings due tomorrow will provide further evidence of the gathering pace of the pre-election economic expansion.
Yet there is little agreement about the Chancellor's next move on interest rates. The next monetary meeting between Mr Clarke and Eddie George, Governor of the Bank of England, is due on 23 September.
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