Inflation drops despite pre-sales price hikes

Some retailers raised prices before Christmas by the biggest margin for 23 years in order to reduce them for the January sales. But behind the seasonal ups and downs, underlying inflation edged closer to its target. Diane Coyle, Economics Editor, asks what it means for interest rates.

Both the headline and target measures of retail price inflation fell fractionally last month, to 3.6 per cent and 2.7 per cent respectively. The figures suggested that rising interest rates have got underlying inflation back on course for its 2.5 per cent target, if not quite there yet.

Lower motoring costs - with a rise in petrol duty in the November 1996 Budget dropping out of the 12-month rate - and cheaper clothing and footwear were the main explanations for the decline.

However, there was strong upward pressure in December from the biggest monthly rise since 1974 in the price of household goods such as washing machines and furniture. The Office for National Statistics said the pattern of pre-Christmas price rises in preparation for January reductions had been getting more pronounced in recent years.

For example, the price of household goods, which usually climbs in November and December, was up 1.3 per cent last month. This compares with a 1 per cent rise the previous December and a 0.7 per cent rise in December 1992.

The typical January price fall has also grown bigger, growing from a drop of 2.3 per cent five years ago to a 3.6 per cent cut last January. Retailers typically raise prices again in February and March.

The year-on-year rate of increase in household goods prices has picked up, however, climbing from 0.9 per cent in September to 1.4 per cent last month.

Despite signs that strong demand is raising prices in some areas, economists welcomed yesterday's inflation figures. The small reduction led some who had expected a further quarter-point rise in interest rates next month to waver in their view, boosted by remarks by one member of the Monetary Policy Committee.

Charles Goodhart told a House of Lords committee that the Asian crisis "makes it likely the extent of rate increases will be less than they otherwise would have been" - although he was not referring specifically to UK interest rates.

Kevin Gardiner of Morgan Stanley said: "I'm not sure the good news will last, but the case for the Bank of England to wait and see next month has grown stronger."

This view was shared by the futures market, where gains yesterday implied a market expectation that the odds are now against another rate rise and that the level of borrowing costs will be falling by mid-year.

Although Budget duty increases for tobacco and alcohol, and some food price and fare rises can be expected to affect January's retail price index , the impact of the sales is expected to lead to another favourable figure for the target measure.

Separate US figures showed consumer prices climbed by just 0.1 per cent in December, making the inflation rate for 1997 as a whole just 1.7 per cent, the lowest since 1986.

The underlying rate increased by more during the month, rising 0.2 per cent, or 2.2 per cent year on year. But this was its lowest rate since 1965.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Sales Assistant / Buyer

£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...

Recruitment Genius: Customer Service Advisor

£15000 - £16000 per annum: Recruitment Genius: Customer Service Advisors are r...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £45K: SThree: SThree were established in 1986....

Recruitment Genius: Compliance Manager

£40000 - £60000 per annum: Recruitment Genius: A Compliance Manager is require...

Day In a Page

Is this the future of flying: battery-powered planes made of plastic, and without flight decks?

Is this the future of flying?

Battery-powered planes made of plastic, and without flight decks
Isis are barbarians – but the Caliphate is a dream at the heart of all Muslim traditions

Isis are barbarians

but the Caliphate is an ancient Muslim ideal
The Brink's-Mat curse strikes again: three tons of stolen gold that brought only grief

Curse of Brink's Mat strikes again

Death of John 'Goldfinger' Palmer the latest killing related to 1983 heist
Greece debt crisis: 'The ministers talk to us about miracles' – why Greeks are cynical ahead of the bailout referendum

'The ministers talk to us about miracles'

Why Greeks are cynical ahead of the bailout referendum
Call of the wild: How science is learning to decode the way animals communicate

Call of the wild

How science is learning to decode the way animals communicate
Greece debt crisis: What happened to democracy when it’s a case of 'Vote Yes or else'?

'The economic collapse has happened. What is at risk now is democracy...'

If it doesn’t work in Europe, how is it supposed to work in India or the Middle East, asks Robert Fisk
The science of swearing: What lies behind the use of four-letter words?

The science of swearing

What lies behind the use of four-letter words?
The Real Stories of Migrant Britain: Clive fled from Zimbabwe - now it won't have him back

The Real Stories of Migrant Britain

Clive fled from Zimbabwe - now it won’t have him back
Africa on the menu: Three foodie friends want to popularise dishes from the continent

Africa on the menu

Three foodie friends want to popularise dishes from the hot new continent
Donna Karan is stepping down after 30 years - so who will fill the DKNY creator's boots?

Who will fill Donna Karan's boots?

The designer is stepping down as Chief Designer of DKNY after 30 years. Alexander Fury looks back at the career of 'America's Chanel'
10 best statement lightbulbs

10 best statement lightbulbs

Dare to bare with some out-of-the-ordinary illumination
Wimbledon 2015: Heather Watson - 'I had Serena's poster on my wall – now I'm playing her'

Heather Watson: 'I had Serena's poster on my wall – now I'm playing her'

Briton pumped up for dream meeting with world No 1
Wimbledon 2015: Nick Bollettieri - It's time for big John Isner to produce the goods to go with his thumping serve

Nick Bollettieri's Wimbledon Files

It's time for big John Isner to produce the goods to go with his thumping serve
Dustin Brown: Who is the tennis player who knocked Rafael Nadal out of Wimbeldon 2015?

Dustin Brown

Who is the German player that knocked Nadal out of Wimbeldon 2015?
Ashes 2015: Damien Martyn - 'England are fired up again, just like in 2005...'

Damien Martyn: 'England are fired up again, just like in 2005...'

Australian veteran of that Ashes series, believes the hosts' may become unstoppable if they win the first Test