Record fall in petrol costs keeps inflation below target

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The Independent Online

A 10 per cent fall in food prices and a record drop in the cost of petrol pushed inflation in the UK further below the Government's target, official figures showed yesterday.

A 10 per cent fall in food prices and a record drop in the cost of petrol pushed inflation in the UK further below the Government's target, official figures showed yesterday.

The annual rate of inflation excluding mortgage payments fell back to 2.2 per cent in July from 2.4 per cent in June. The target is 2.5 per cent. The headline rate, often used in wage negotiations, dropped from 1.9 per cent to 1.6 per cent.

The figures were in line with data on Monday showing an unexpected fall in the prices of goods leaving British factories.

Economists in the City of London said the fall in inflation would not necessarily trigger another cut in interest rates as the Bank of England had made clear it expected further falls this year.

But they were divided over the picture the detailed figures painted for inflation and rates over the coming months. Some said the fallback showed the spike in inflation in May and June had been due to temporary rises in food prices, in response to foot-and-mouth disease, and rising global oil prices. Seasonal food prices dropped 9.8 per cent in July while petrol prices were 7.4 per cent lower than a year ago, the steepest fall in its cost since records began in 1987.

Hillary Cook, an economist at Barclays Stockbrokers, said: "With the impact of foot-and-mouth fading and falling oil prices, we could see inflation falling back further in the next month or so and that leaves scope to cut rates further."

But after stripping out food and oil, inflation accelerated from 2.4 to 2.7 per cent, which is the highest rate for two and half years. Inflation for services was unchanged at 4 per cent while the prices of consumer durable goods on the high street fell at an annual rate of 0.5 per cent compared with an average drop of 2.5 per cent last year.

Michael Saunders, UK economist at Schroder Solomon Smith Barney, said erratic factors had masked the poor performance of core inflation.

"We suspect inflation will rise to about 2.5 per cent this month, the first time since early 1995 it has not been below target. That prospect should be enough to keep the Monetary Policy Committee from cutting [rates] in the next couple of months," he said.

Interest rate "doves" will hope weaker demand and a rise in unemployment – possibly in official labour market data today – will contain inflation.

Ciaran Barr, chief UK economist at Deutsche Bank, said: "With inflation this low, [then] if growth stays weak it will be met with further rate cuts."

The pound, which on Monday hit a five-month low against the euro, was little changed after yesterday's news. Sterling's trade-weighted index has fallen 4 per cent since June.

A continued fall in sterling's exchange rate would be welcomed by exporters, but its inflationary impact, by raising import prices, could dent hopes of rate cuts.

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