Falling inflation raises prospect of new year cut in interest rates

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The Independent Online

Falling petrol prices and lower European air fares pushed inflation last month to its lowest level since June, supporting the view that inflation has peaked and bolstering expectations of another rate cut next year.

Official figures showed consumer price inflation fell to an annual rate of 2.1 per cent in November, from 2.3 per cent in October. That left inflation above the Bank of England's 2 per cent target for the fifth month in a row, but economists said the effect of oil price surges over the summer had dissipated and predicted that overall price pressures would continue to ease.

George Buckley, at Deutsche Bank, said: "Inflation looks to have peaked, and we expect it to continue to decline, helped by lower petrol costs and weaker economic growth over the past year. Indeed, we see inflation dipping back below 2 per cent during the first half of 2006, where we expect it to remain for the rest of the year."

Core annual inflation, excluding energy, food, alcohol and tobacco, eased to 1.5 per cent from 1.6 per cent in October.

The main factor behind the slowdown in inflation was a drop in petrol prices, which were down 3.6p a litre between October and November, compared with an increase of 1.1p a year ago. Moreover, airfares dropped by 12.6 per cent in November compared with the previous month. An intensifying price war between airlines meant fares on international routes fell, especially on short-haul European flights. The cost of overnight stays in UK hotels also fell. A slight upward pressure on inflation came from alcohol and tobacco as well as food, mainly beef.

The Bank of England has indicated it is in no rush to move interest rates after leaving them unchanged for the fourth month last week. It is keeping a close eye on the new year wage round to see whether rising utility bills and petrol prices have pushed up pay demands. Reassuringly, RPI inflation, the rate on which many pay deals are based, fell to 2.4 per cent in November, its weakest rate in three years.

However, some economists warned there were still upside risks to inflation, particularly from gas prices, which have soared due to slower UK production.

Consumer prices last year were around 25 times higher than in 1947, with the cost of housing rising fastest. House prices are now over 50 times higher than they were in 1947.

Separate figures showed investment by UK companies abroad rose to £51.8bn last year, from £38.1bn the previous year. Foreign companies invested £30.7bn in Britain, an increase of £20.4bn from 2003.