Dearer clothes leave inflation above target

Inflation remained above the Bank of England's target at 2.9 per cent last month, as a large fall in the cost of foreign holidays was offset by the highest clothes prices for six years. But economists said the rate of inflation, which was above the Bank of England's 2.5 per cent target for the tenth consecutive month, was likely to taper off over the next few months, providing scope for interest rates to remain at a 48-year low well into next year.

The headline rate fell to 2.9 per cent from 3.1 per cent in July while the underlying rate excluding mortgage costs ­ which the Bank targets ­ was unchanged at 2.9 per cent, after unexpectedly jumping from 2.8 per cent in June. "The figures are bang in line with consensus and should not affect the interest rate debate one way or the other," said Philip Shaw, chief economist at Investec bank.

The Office for National Statistics said petrol and oil prices were up 1.1 per cent on the month to stand 3.1 per cent higher than a year earlier, pushing overall goods inflation to 0.6 per cent, the highest for two years. The heatwave meant shoppers missed out on August sales, with prices of clothing and footwear soaring by 0.6 per cent ­ the strongest number for six years. This followed the least generous July sales for 13 years, translating into a bumper summer for the UK's retailers.

Those Britons who missed out on the chance to take a cut-price holiday overseas ­ the cost of advance booked holidays to most European destinations was lower than last August ­ had to pay more for their sunscreen to protect them from temperatures of more than 100F in some parts of the country, the ONS said. The fall in the price of foreign holidays this year brought inflation in the dominant services sector down to 4 per cent in August from 4.2 per cent in July.

Also offsetting the rising price of clothes was housing, which contributed the biggest downward effect to the headline inflation rate in the wake of July's surprise interest cut to 3.5 per cent. This prompted mortgage lenders to reduce mortgage rates by an average of 0.18 percentage points, the ONS said.

July's interest rate cut was likely to have been the last for some time, Stephen Nickell, who sits on the Bank of England's interest rate-setting Monetary Policy Committee, signalled in a speech yesterday. He said: "Who knows if we are at a trough? It is more probable that we are a trough but that is a long way from saying we are at the trough."