City experts will look to the Bank of England's quarterly Inflation Report, due next week, for confirmation of their hope that rates have reached a peak. The report is expected to show underlying inflation on target, despite concerns about pay pressures and spending.
New figures yesterday showed there was no change in prices manufacturers charged for their goods in January and the year-on-year inflation rate declined to 0.7 per cent. This was the lowest since July 1986, itself the lowest since 1963 when the statistics begin.
Core prices, excluding volatile components such as food and petrol, fell 0.1 per cent during the month, taking the annual rate of growth to 0.6 per cent.
The drop in oil prices - down 8.7 per cent during one month in sterling terms - took the cost of materials in manufacturing to a level nearly 10 per cent lower than a year ago. Input prices are only 4 per cent higher than they were a decade ago.
But there are enough signs of strength in consumer spending and the jobs market to keep analysts reluctant to conclude there was absolutely no danger of another rate rise.
The latest signal was a survey of retailers showing a boom in January sales, with nearly a fifth of the recipients of free building society shares saying they had spend some of the windfall. The British Retail Consortium reported a 9 per cent rise in the value of sales in the year to January, or 6.1 per cent on a like-for-like basis.
Both were the highest since the autumn of 1996, although the BRC stressed the trend in the latest three months together was weaker than last summer. The Consortium also emphasised the fact that shoppers had been bargain- hunting.
"Retailers suggested that customers appear to have become more astute in delaying major purchases until the January sales started," the report said. There was support for this in the detail, which showed a big rush in the first two weeks of the year for electrical goods
Bridget Rosewell, the BRC's economic adviser, said: "These results support last week's decision by the Bank of England not to raise interest rates."
A survey of recipients of building society share windfalls conducted in December showed 18 per cent intended to spend some of their saved proceeds in the January sales, and a further 13 per cent said they might do so.
The continuing uncertainty about how much weight to put on the strength of consumer spending as opposed to the weakness of manufacturing means today's figures for retail prices and tomorrow's for average earnings will be closely scrutinised. David Walton, an economist at Goldman Sachs, said: "There is no threat at all of inflationary pressures in the manufacturing sector. The problem for the inflation outlook lies in the service sector and the effect of the tight jobs market on wages."
Ciaran Barr, of Morgan Deutsche Grenfell, said it was another "benign" set of data but said the Bank of England would have to raise rates again.
"There is no real sign of significant inflationary pressure emanating from the industrial sector as the twin pressures of sterling strength and Asian turmoil take their toll.
"But going forward, it is going to be the labour market, the service sector that are of more concern to the Bank of England. This could be a re-run of last year when the industrial sector gave out virtually no inflationary pressures yet the Bank tightened in response to the inflationary pressures elsewhere in the economy."
- Diane Coyle
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