Inflation at 2% slips further below target

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The Independent Online

The Government's target measure of inflation fell to 2 per cent last month, its lowest level since records started in 1975. The rate has remained below the 2.5 per cent target for 12 months, and yesterday's figures brought fresh calls from business for lower interest rates.

The Government's target measure of inflation fell to 2 per cent last month, its lowest level since records started in 1975. The rate has remained below the 2.5 per cent target for 12 months, and yesterday's figures brought fresh calls from business for lower interest rates.

However, the headline inflation rate jumped from 2.3 per cent to 2.6 per cent, its highest since the end of 1998. The reason was increased mortgage costs and rises in excise duties, which are likely to take it higher still in April.

This is the month when state pensions and most benefits are uprated based on last September's headline inflation figure. That was just 1.1 per cent, the lowest since 1963, and triggered protests over the rise in pensions of less than £1 a week.

City economists said yesterday's figures were disappointing but would not sway the interest rate debate. Most had expected the target inflation measure, which excludes mortgage costs, to drop below 2 per cent. Official figures for average earnings and unemployment, due this morning, are likely to have more influence on the Monetary Policy Committee.

John Vickers, one of its nine members and the Bank of England's chief economist, said interest rates could not be used to bring down the pound. "The exchange rate is ... a major factor in the setting of monetary policy," he said.

Mr Vickers said the strong pound had helped dampen UK inflation. "Even so, inflation has not been far below target, indicating that domestic inflationary pressures have needed to moderate," he added.

Business and unions said yesterday there was no need for a further hike in interest rates, although most City analysts expect one. Sudhir Junankar, an economist at the Confederation of British Industry, said: "We would expect competitive pressures to keep underlying inflation below target within the next 18 months."

The figures showed the main upward effect on headline inflation came from higher mortgage costs. The February rate rise was passed on to borrowers in March, while a decrease in February 1999 dropped out of the comparison.

The timing of excise duty increases this year and last made a big negative contribution to March's inflation rate, one which will be reversed in the April figure. The 1999 duty increases have dropped out of the 12-month increase before those in the latest Budget take effect.

The figures also showed an ever-wider gap between goods and services inflation. Goods prices were down 0.2 per cent compared with the previous March, yet services prices were up 4.2 per cent. John O'Sullivan, an economist at Dresdner Kleinwort Benson, said: "There is a widening dispersion between what's happening to goods and what's happening to the rest of the RPI. It is worrying but I'm not sure how policy can tackle it."

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