Inflation falls below Bank's target

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The Independent Online

Inflation unexpectedly moved below the Bank of England's 2 per cent target in January and December, prompting City economists to shorten the odds of an interest rate cut.

It held at 1.9 per cent in both months despite rising fuel costs and surging household energy bills, official data showed yesterday. The figures wrong-footed analysts who had expected the rate to pick up to 2.1 per cent in January. In addition, December's 2 per cent figure was revised down to 1.9 per cent.

Rising fuel and transport costs were offset by heavier-than-expected discounting in the January sales as well as lower banking fees. Cut-throat competition on the high street forced furniture and clothing retailers in particular to slash prices more than last year, while last year's increases in bank overdraft fees were not repeated this year. The price of children's toys and computer games came down while package holidays and food were also cheaper.

That more than offset rising petrol prices, which were up 1.7p a litre to 88.8p, and higher air fares compared with last year. The figures came a day after factory-gate inflation accelerated as manufacturers managed to pass on higher energy costs to customers.

Alan Castle, at Lehman Brothers, said that barring a large rebound in February prices after the January discounting, consumer price inflation is likely to be stuck around the 1.9 per cent level for the rest of the year, lower than the Bank's previous inflation estimates.

It appears that the inflation figures, released the day before the Bank's key quarterly Inflation Report, have come too late to influence its forecasts. While the Governor, Mervyn King, usually receives the data several days in advance, it is unlikely to have been factored into the detailed staff projections. That leaves him to explain at today's press conference how the inflation slowdown in January would have influenced the Bank's thinking.

Separately, an admission by the Office for National Statistics that it had significantly underestimated the impact of software investment lifted economic output.