UK inflation eases back to 2 per cent

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The odds of a cut in interest rates shortened yesterday after official figures showed that inflation had fallen to a six-month low in December.

Better deals on airfares and falls in petrol prices pushed the annual rate of consumer price inflation (CPI) to 2.0 per cent - the target the Bank of England must aim for when setting rates - from November's 2.1 per cent.

Stripping out volatile components such as fuel and food, inflation dropped to a 10-month low of 1.3 per cent, which analysts said pointed to weak underlying inflationary pressures.

"This very much keeps the door open for an interest rate cut in February," Howard Archer, the chief UK economist at consultants Global Insight, said.

The pound fell against both the dollar and the euro as traders priced in an increasing chance of a rate cut. Against the dollar it eased half a cent to $1.7626 while the euro rose to 68.60p.

Mr Archer and other economists who predict a rate cut believe the Bank's Monetary Policy Committee will wait to see firmer evidence of consumer spending and wage settlements in the key new year period.

David Hillier, the chief UK economist at Barclays Capital, said pay settlements would rise over coming months as workers sought to offset the impact of higher utility and petrol bills.

"That should push earnings growth up to a level inconsistent with hitting the CPI target in the medium term," he said.

However, retail price index inflation, on which most pay deals are based, slowed more than expected to 2.2 per cent from 2.4 per cent in November, the weakest since October 2002.