Static inflation sends the pound plummeting

George's guns 'comprehensively spiked by these numbers'


Economics Editor

Pressure for a rise in interest rates eased significantly yesterday, sending the pound down sharply against the US dollar and European currencies.

Behind the fall were suprising government figures showing that the annual rate of inflation did not move last month. The 3.5 per cent year-on-year figure shocked the markets, which had been expecting a steeper rise.

Coming after fresh evidence of subdued wage inflation, the figures were seen as a further blow to the Governor of the Bank of England, Eddie George, in his tussle with the Chancellor, Kenneth Clarke, over interest rates.

The pound fell 1.5 cents against the dollar to $1.5337 and by two pfennigs against the mark to DM2.2654. The trade-weighted index ended at 84.3, a fall of six-tenths of a point.

The Treasury welcomed the figures as signs that inflationary pressures were being contained. Headline inflation has been under 4 per cent for 38 months, the longest sustained period since the war.

Headline and underlying inflation stayed at 3.5 per cent and 2.8 per cent in July, confounding market expectations of a rise, and delivering the Government a welcome fillip after the setback of the first rise in unemployment in two years.

"Eddie George's guns have been comprehensively spiked by these numbers," Ian Shepherdson, economist at HSBC Markets, said. The gilts market took the same view, with the September future initially rising half a point as fears of interest rate increases receded.

The annual rates of headline and underlying inflation (excluding mortage interest payments) had been expected to rise to 3.7 and 3 per cent respectively because of the effect of heavy discounting in last year's summer sales.

These had resulted in a sharp decline of 0.5 per cent in the retail price index compared with its level in June 1994, a fall the City did not think could be matched this year.

But the markets were wrong: the retail price index did drop back in July, by 0.5 per cent, leaving the annual rate of inflation unchanged. The monthly decline in the retail price index, excluding mortgage interest payments, was the largest in the 20 years the series has been compiled.

However, inflation is still generally expected to pick up in the autumn as particularly favourable influences such as lower than usual seasonal food prices go into reverse.

Seasonal food, which had shown only modest declines at the same time of year in 1994, fell 7 per cent on the month, following an even bigger decline in June. A fall in potato prices as new potatoes came into the stores accounted alone for a fifth of the monthly decline in the all-items index.

The drought is expected to make the usual increase in seasonal food prices in August worse. The hot weather which has helped to bring down prices could exact its own price with a sharp rebound in seasonal food inflation.

There is also doubt about the continuing capacity of retailers to absorb the higher prices being charged by manufacturers. Earlier in the week it was revealed that factory gate inflation had jumped unexpectedly from 4.2 to 4.5 per cent in July.

Retailers certainly took it on the chin in the summer sales. The most startling revelation from the figures was a 4.6 per cent monthly decline in clothing and footwear. This was larger even than the 4.2 per cent fall last July.

Comment, above

Alexis Sanchez has completed a £35m move to Arsenal, the club have confirmed
sportGunners complete £35m signing of Barcelona forward
Poor teachers should be fearful of not getting pay rises or losing their job if they fail to perform, Steve Fairclough, headteacher of Abbotsholme School, suggested
voicesChris Sloggett explains why it has become an impossible career path
world cup 2014
Ray Whelan was arrested earlier this week
Arts and Entertainment
In a minor key: Keira Knightley in the lightweight 'Begin Again'
Arts and Entertainment
Celebrated children’s author Allan Ahlberg, best known for Each Peach Pear Plum
peopleIndian actress known as the 'Grand Old Lady of Bollywood' was 102
Wayne’s estate faces a claim for alleged copyright breaches
newsJohn Wayne's heirs duke it out with university over use of the late film star's nickname
Life and Style
It beggars belief: the homeless and hungry are weary, tortured, ghosts of people – with bodies contorted by imperceptible pain
lifeRough sleepers exist in every city. Hear the stories of those whose luck has run out
Mick Jagger performing at Glastonbury
Life and Style
fashionJ Crew introduces triple zero size to meet the Asia market demand
ebookA unique anthology of reporting and analysis of a crucial period of history
Santi Cazorla, Mikel Arteta and Mathieu Flamini of Arsenal launch the new Puma Arsenal kits at the Puma Store on Carnaby Street
sportMassive deal worth £150m over the next five years
Arts and Entertainment
Welsh opera singer Katherine Jenkins
musicHolyrood MPs 'staggered' at lack of Scottish artists performing
Life and Style
beautyBelgian fan lands L'Oreal campaign after being spotted at World Cup
Arts and Entertainment
Currently there is nothing to prevent all-male or all-female couples from competing against mixed sex partners at any of the country’s ballroom dancing events
Potential ban on same-sex partners in ballroom dancing competitions amounts to 'illegal discrimination'
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Business Analyst Consultant (Financial Services)

£60000 - £75000 per annum: Harrington Starr: Business Analyst Consultant (Fina...

Systems Administrator - Linux / Unix / Windows / TCP/IP / SAN

£60000 per annum: Harrington Starr: A leading provider in investment managemen...

AVS, JVS Openlink Endur Developer

£600 - £700 per day: Harrington Starr: AVS, JVS Openlink Endur Developer JVS, ...

Technical Support Analyst (C++, Windows, Linux, Perl, Graduate)

£30000 per annum: Harrington Starr: A global leader in trading platforms and e...

Day In a Page

A History of the First World War in 100 Moments: Peace without magnanimity - the summit in a railway siding that ended the fighting

A History of the First World War in 100 Moments

Peace without magnanimity - the summit in a railway siding that ended the fighting
Scottish independence: How the Commonwealth Games could swing the vote

Scottish independence: How the Commonwealth Games could swing the vote

In the final part of our series, Chris Green arrives in Glasgow - a host city struggling to keep the politics out of its celebration of sport
Out in the cold: A writer spends a night on the streets and hears the stories of the homeless

A writer spends a night on the streets

Rough sleepers - the homeless, the destitute and the drunk - exist in every city. Will Nicoll meets those whose luck has run out
Striking new stations, high-speed links and (whisper it) better services - the UK's railways are entering a new golden age

UK's railways are entering a new golden age

New stations are opening across the country and our railways appear to be entering an era not seen in Britain since the early 1950s
Conchita Wurst becomes a 'bride' on the Paris catwalk - and proves there is life after Eurovision

Conchita becomes a 'bride' on Paris catwalk

Alexander Fury salutes the Eurovision Song Contest winner's latest triumph
Pétanque World Championship in Marseilles hit by

Pétanque 'world cup' hit by death threats

This year's most acrimonious sporting event took place in France, not Brazil. How did pétanque get so passionate?
Whelks are healthy, versatile and sustainable - so why did we stop eating them in the UK?

Why did we stop eating whelks?

Whelks were the Victorian equivalent of the donor kebab and our stocks are abundant. So why do we now export them all to the Far East?
10 best women's sunglasses

In the shade: 10 best women's sunglasses

From luxury bespoke eyewear to fun festival sunnies, we round up the shades to be seen in this summer
Germany vs Argentina World Cup 2014: Lionel Messi? Javier Mascherano is key for Argentina...

World Cup final: Messi? Mascherano is key for Argentina...

No 10 is always centre of attention but Barça team-mate is just as crucial to finalists’ hopes
Siobhan-Marie O’Connor: Swimmer knows she needs Glasgow joy on road to Rio

Siobhan-Marie O’Connor: Swimmer needs Glasgow joy on road to Rio

18-year-old says this month’s Commonwealth Games are a key staging post in her career before time slips away
The true Gaza back-story that the Israelis aren’t telling this week

The true Gaza back-story that the Israelis aren’t telling this week

A future Palestine state will have no borders and be an enclave within Israel, surrounded on all sides by Israeli-held territory, says Robert Fisk
A History of the First World War in 100 Moments: The German people demand an end to the fighting

A History of the First World War in 100 Moments

The German people demand an end to the fighting
New play by Oscar Wilde's grandson reveals what the Irish wit said at his trials

New play reveals what Oscar Wilde said at trials

For a century, what Wilde actually said at his trials was a mystery. But the recent discovery of shorthand notes changed that. Now his grandson Merlin Holland has turned them into a play
Can scientists save the world's sea life from

Can scientists save our sea life?

By the end of the century, the only living things left in our oceans could be plankton and jellyfish. Alex Renton meets the scientists who are trying to turn the tide
Richard III, Trafalgar Studios, review: Martin Freeman gives highly intelligent performance

Richard III review

Martin Freeman’s psychotic monarch is big on mockery but wanting in malice