Inflation above target despite latest fall

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The headline rate of inflation fell to 2.1 per cent last month, rounding off a week of favour-able economic news. But there was disappointment for the Government as its target measure of inflation refused to decline.

City experts said yesterday that the fact that this measure - the headline retail price index less mortgage interest payments - was stuck above the 2.5 per cent target would make it harder for Kenneth Clarke, the Chancellor of the Exchequer, to cut interest rates.

Ian Shepherdson at HSBC Markets, who thinks the Government will hit its inflation target before long, said: "These figures will make an early rate cut a risky exercise for Mr Clarke."

Other analysts had stronger words of caution for the Chancellor. "Monetary policy will need to be tightened next year to head off higher inflation in 1998," said David Walton at investment bank Goldman Sachs.

Most predict that inflation will continue to fall in the short term, not least because inflation at the factory gate has reached a 29-year low. The target measure could edge below 2.5 per cent during the next six months.