Inflation falls to its lowest level for eight months

INFLATION dropped to an eight-month low of 3.9 per cent in June, as subdued high street spending continued to restrain price rises, official figures showed yesterday. Underlying inflation - excluding mortgage interest payments - fell to a four-year low.

The Treasury welcomed the figures, but remains concerned that inflation in the service sector - which is less exposed to international competition and the discipline of the exchange rate mechanism than manufacturing - remains stubbornly high. For example, household goods inflation was 2.6 per cent in June compared with 5.9 per cent for household services.

The figures were better than the City expected, which helped the pound to recover from early- morning jitters. It closed up 1.4 cents at dollars 1.9195. But the dollar pulled it down against the mark, to close 0.03pf down at DM2.8752. The US currency fell back below DM1.51 as the profit- taking that dominated trading on Thursday gave way to the underlying bearish mood.

More than half the drop in headline inflation from 4.3 per cent in May resulted from food prices. In June last year the cost of seasonal foods rose unexpectedly, but it fell last month. This cut the inflation rate for food to 1.7 per cent in June, the lowest for nine years.

Inflation was also reduced by sharp price-cutting for DIY products and gardening goods. But taxi fares rose, Budget increases in excise duties continued to feed through to prices of alcoholic drink, and the third phase of electricity price rises fed into the retail price index.

The fall in inflation was partly offset by cuts in mortgage interest payments last year falling out of the annual comparison.

Excluding these factors - giving the Government's preferred measure of underlying pressure on prices - inflation fell from 5.3 to 4.8 per cent, the lowest level since June 1988.

Most City measures of underlying inflation, which exclude items such as seasonal foods and utility prices, also fell on the month. Economists expect headline inflation to remain under downward pressure and to hit the Treasury's Budget target of 3.75 per cent in the fourth quarter.

Patrick Foley, the chief economist at Lloyds Bank, said that inflation could be down to 2.5 per cent by the end of 1993. He added that good news on prices 'could also pave the way for lower interest rates before the end of the year'.

(Graph omitted)