Inflation at lowest level for a decade

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The Independent Online
The Chancellor of the Exchequer, Kenneth Clarke, was yesterday handed further ammunition to fend off Bank of England pressure for higher interest rates after underlying factory gate inflation in July hit its lowest level for decades.

Official figures showed the cost of industry's raw materials grew by 2.2 per cent last month, down 0.1 per cent on June, while the prices charged at the factory gate grew by 2.2 per cent, compared with 2.5 per cent the previous month. Stripping out volatile items, defined as food, drink, tobacco and petrol, the underlying input price fall was the biggest for nearly 10 years, while the increase in output prices was the smallest since November 1967.

The figures were described as "excellent" by analysts, who said they provided further good news for the Chancellor on retail prices, with the July index due to be announced on Thursday. Adam Cole, economist at HSBC Markets, said the data showed minimal price pressures on both the input and output side. Furthermore, he suggested that with producer output prices being a lead indicator of retail price inflation, "it looks as if the market is likely to be pleasantly surprise by the RPI data at the end of this year and the beginning of next".

Morgan Stanley economist Kevin Gardiner said the latest figures were not enough to justify a further rate cut, but they should help Mr Clarke fend off calls from the Bank of England for higher rates "for a good few months yet".

He will be buttressed by news today of a slowdown in high street sales in July. A survey by the British Retail Consortium showing sales growth slipping to an annual rate of 5.4 per cent in July from 7 per cent in June has led to a call for restraint on any rise in interest rate rises.

Andrew Sentance, chief adviser to the BRC, describes the underlying trend of retail sales as healthy. The slowdown should allay fears that consumer spending is rising too strongly. "Calls for higher interest rates to head off inflationary pressures are premature to say the least."

The fall in July output prices was the third successive monthly fall, the only string of such declines since the series began in 1963. Core output prices dipped by 0.1 percentage points on the month to 1.5 per cent.

Hamish McRae, page 19