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Low inflation hopes cheer Clarke

Signs of low inflation in the pipeline and steady but not surging sales on the high street helped take the pressure off the Chancellor of the Exchequer to agree to a rise in the cost of borrowing after tomorrow's meeting with Eddie George, Governor of the Bank of England, writes Diane Coyle.

Although a majority of City analysts still expect Mr George to advise higher interest rates, financial market sentiment has swung in favour of the view that Mr Clarke can probably keep them unchanged before the election.

The pound fell more than a pfennig against the German mark yesterday after the publication of figures showing prices charged at the factory gate rose by only 1.7 per cent in the 12 months to December. This was the lowest rate of output price inflation since October 1986.

Prices manufacturers pay for materials have fallen by nearly 6 per cent during the past 12 months, helped by the strength of the pound.

Separately, a survey of high street sales by the British Retail Consortium showed that retail spending grew last month at a slower pace than during October and November. A flurry of Christmas trading statements from retailers confirmed that most had recorded strong but not booming sales. However, a report published today by research group Income Data Services notes signs that higher inflation is starting to affect pay awards.

Mixed evidence on the state of the economy during the past week has given Mr Clarke useful ammunition against the Bank of England's preference for a tougher policy. "It would be one of the most surprising moves of the year if the Chancellor raised rates this week," said Simon Briscoe, an economist at Nikko Europe.

Boots yesterday confirmed other retailers' comments when it said Christmas sales were slow through December until a final surge in the last few days. Announcing a 6 per cent increase in Christmas trading on the same period last year, Boots chief executive Lord Blyth said the performance was "satisfactory overall".

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