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

Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
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

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

'We will not sit down with Nicola Sturgeon'

In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

How ordinary Britons celebrated VE Day

Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
They came in with William Caxton's printing press, but typefaces still matter in the digital age

Typefaces still matter in the digital age

A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

'Missing link' between Earth's two life-forms found

New microbial species tells us something about our dark past, say scientists
The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

Pan Am Experience: A 'flight' back to the 70s

Tim Walker checks in and checks out a four-hour journey with a difference
Humans aren't alone in indulging in politics - it's everywhere in the animal world

Humans aren't alone in indulging in politics

Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

Crisp sales are in decline

As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

Ronald McDonald the muse

A new wave of artists is taking inspiration from the fast food chain
13 best picnic blankets

13 best picnic blankets

Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

Barcelona vs Bayern Munich player ratings

Lionel Messi scores twice - but does he score highest in our ratings?
Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

Explosive batsman who sets the range for Kiwis' big guns

Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'