CPI inflation holds steady at 1.8 per cent

Hopes of an interest rate cut were raised yesterday after the Office for National Statistics revealed that inflation held steady at an annual rate of 1.8 per cent last month. The consumer prices index figure was below the City's expectations of 1.9 per cent and the Bank of England's target of 2 per cent.

Falls in the price of gas and electricity helped offset a sharp rise in the price of food – according to the ONS, in September there was a record monthly inc-rease in the price of milk, which rose by an average of 4p.

Other dairy products also rose, although vegetable prices were lower and falls in the price of clothing – particularly winter coats – and footwear also helped keep the CPI down.

The figure for the retail prices index – viewed by many as giving a better picture because, unlike the rival measure, it includes housing costs – eased to 3.9 per cent from 4.1 per cent in August. Interest rates were held last month but economists were cautious over whether the better-than-expected inflation rate would persuade the Bank of England's Monetary Policy Committee to cut rates at its next meeting.

Philip Shaw, an economist with Investec, said: "Inflation indicators have been surprisingly benign over the last three months. At 1.8 per cent, the CPI is not only below target but it is also below the Bank of England's central projection in its August projection. There are some good reasons for easing monetary policy. They would primarily stem from the likely effects of the credit squeeze."

But Douglas Roberts, from Standard Life, was more cautious. He pointed out that Mervyn King, the Governor of the Bank of England, recently set out three major triggers for change: cap-acity pressures, inflation expectations and pricing power. Based on the evidence of these, there still did not appear to be enough pressure to justify a cut. "The figures were welcome but I would not think we will be seeing a cut," he warned.