Inflation stays above target, but Bank is unmoved

Inflation remained above the Government's 2.5 per cent target for the third month in a row in January but City economists said the Bank of England was unlikely to be worried.

The target rate of inflation in the year to January reached 2.7 per cent compared with expectations of a slight fall to 2.6 per cent. The headline rate, which includes the cost of home loans, remained at 2.9 per cent.

The Office for National Statistics attributed the higher-than-expected inflation rate to increases in clothing and footwear prices and higher motoring costs. Offsetting this was a steep fall in seasonal food prices.

Economists said the Bank's Monetary Policy Committee, which unexpectedly cut interest rates by a quarter point to 3.75 per cent a fortnight ago, would not be unduly concerned. In last week's Inflation Report the MPC forecast that inflation would rise towards 3 per cent this year before falling to the target rate at the end of next year.

John Butler of HSBC, said: "The MPC has sent out a message in recent weeks that is loud and clear. They are no longer treating the 2.5 per cent target symmetrically. The MPC will treat inflation above the target as a purely secondary issue while growth risks persist. Even inflation topping 3 per cent is unlikely to cause them to hike rates."

Clothing and footwear prices did not fall by as much as they normally do in January, said the ONS, because many retailers appeared to have begun their new year sales early in December.

Seasonal food prices fell by 7.7 per cent as the bad weather that caused a sharp upward tick in prices in January 2002 was not repeated. Petrol and oil prices rose 7.2 per cent, the fastest increase since December 2000. Petrol and seasonal food prices are both prone to erratic fluctuations because of the unpredictable nature of oil prices and the weather.

Ross Walker of RBS Financial Markets, said: "I don't think the BoE will react at this point. They will play this down. They will say these are essentially short-term effects that are likely to unwind."

However, expectations of further rate cuts in the UK weighed on the pound yesterday, which hit a three-and-a-half year low against the euro of 67.32p. Sterling also set a seven-week low against the dollar of $1.5903 and fell to 189.20 yen.

Analysts said a stronger dollar and worries about Britain's economic and political prospects were behind the falls.