Heavy discounting on the high street helped take the underlying inflation rate down to 2.4 per cent in February, the first time it has dipped below its 2.5 per cent target since November 1994. Falls in second-hand car prices were another factor behind the surprise 0.2-point tumble in underlying inflation, according to data from the Office for National Statistics (ONS).
There was an even sharper fall in the headline rate of inflation, which dropped 0.3 points to a five-year low of 2.1 per cent. Recent falls in borrowing costs, which are not included in the underlying inflation measure, wiped almost 0.2 points from the headline rate in February.
Additional downward effects on inflation came from alcohol and chemist goods, although these were partially offset by food price inflation, which hit a two-and-a-half year high.
Sterling weakened to over 67p against the euro following the release of the figures, although it later made up lost ground to close at 66.8p. Short sterling surged as analysts re-evaluated the chances of another interest rate cut next month.
The data prompted renewed rate cut calls from industry. Ian Peters, deputy director general of the British Chambers of Commerce, said: "The figures strengthen our view that the Bank of England should cut rates by half a per cent."
Analysts warned that the next set of inflation figures, which will take account of Budget increases in tobacco and petrol duty, are likely to be less favourable. The Budget changes could add almost 0.5 per cent to headline inflation, according to the ONS. However, few analysts thought these temporary effects would stand in the way of further rate cuts from the Bank.
Speaking in Manchester last night, DeAnne Julius, a member of the nine- strong Bank of England Monetary Policy Committee, said she hoped flexibility in the service sector would allow the economy to combine a high level of employment with low inflation.
Data released by the Engineering Employers' Federation yesterday showed that pay deals in the sector stabilised in the three months to February at 2.6 per cent.