Surprise fall in inflation makes rate rise unlikely

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The Independent Online

Inflation unexpectedly fell further below the official target last month as clothes outlets struggled to raise prices while wet weather kept shoppers away from the high street.

Inflation unexpectedly fell further below the official target last month as clothes outlets struggled to raise prices while wet weather kept shoppers away from the high street.

The annual rate fell to 1.3 per cent from July's 1.4 per cent and further away from the 2.0 per cent that the Bank of England must target when setting interest rates. However, the headline rate that is used in wage bargaining rose to a four-year high of 3.2 per cent as the impact of rate rises fed through to household budgets.

Analysts had expected the rate to remain steady at 1.4 per cent and the pound fell against the dollar as the chances of another rise in interest rates fell on the back of the data.

James Knightley, at ING Financial Markets, said: "It makes an October rate rise look less likely and will cast further doubt on whether the Bank will increase rates in November."

The Office for National Statistics said the main downward force on inflation was a 5.7 per cent drop in prices of clothes and shoes, the biggest such drop since December 2002. The ONS said the traditional recovery in prices after the summer sales was weaker than a year ago. "Weak activity on the high street forced retailers to extend their summer sales," Paul Dales, at Capital Economics, said.

The drop in clothes prices contributed to an overall 0.7 per cent fall in goods prices. This contrasted with a 3.5 per cent rise in prices of services, driven by a record 3.8 per cent jump in utility costs. However, there was little sign of an impact from the soaring cost of commodities, which pushed industrial inflation to a nine-year high, according to ONS figures on Monday.

Even petrol price inflation fell, from 7.6 to 7.2 per cent, although motoring groups are braced for prices to creep back up if the oil prices continued to rebound. Inflation for September - the month used for upgrading a range of benefits - could also be driven up by the rise in gas bills due to take effect as well as traditional rebounds in prices of clothes, food and furniture.

Graham Turner, at GFC Economics, said the Bank would be more worried about the danger to its inflation target two years hence from rising industrial inflation and a falling pound. "One final rate rise in November still looks very possible," he said.

Meanwhile, a member of the Bank's Monetary Policy Committee warned there was a "significant probability" of a fall in house prices. Stephen Nickell said the ratio of house prices to earnings was now "well above" its 20-year average. He said house prices were close to being six-times average earnings, while that ratio would have to fall by one-third to return to its long-term average. "There is a significant probability that house prices will fall," he said. In a speech that was seen as a sign he would not vote for an imminent rate rise, Professor Nickell dismissed the idea that Britain was in the grips of a consumer boom.

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