Statistics point to steady growth and low inflation

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The Independent Online
Kenneth Clarke, Chancellor of the Exchequer, could not have wished for a better set of economic statistics than he got yesterday, painting a picture of low inflation and steady, sustainable growth. The favourable economic background helped keep the pound at its highest level against the German mark for nearly two years.

Yesterday's figures suggest that the Chancellor will be able to brush off pressure from the Bank of England to raise the cost of borrowing. Eddie George, the Bank's Governor, has warned that base rates will have to rise at some point to keep inflation on target.

Underlying inflation at the factory gate last month returned to its lowest since 1967, at less than 1 per cent. Most of September's increase in manufacturers' costs and in the prices they charged for their output was due to higher oil prices.

The Treasury said this was "an excellent base for falls in inflation in the high street".

A separate survey showing that retail sales by big stores remained healthy in September but had slipped back from August's heady pace of increase backed this claim. "Fears of a runaway consumer boom are misplaced," said Andrew Higginson, chairman of economic affairs for the British Retail Consortium.

The recent surge in oil prices took prices at the factory gate up 0.4 per cent last month to a level 2.2 per cent higher than a year earlier. It was the biggest monthly increase since January, with crude oil prices at their highest since the Gulf War.

However, "core" prices, excluding food and energy, rose only 0.1 per cent. Their annual rate of increase slowed to 0.9 per cent, the lowest for nearly 30 years. Prices paid by manufacturers for inputs of fuel and raw material rose 0.3 per cent last month. But their core rise was also only 0.1 per cent, taking them 6.5 per cent lower than a year earlier.

"All this bodes well for inflationary pressures at the retail level," said Alex Garrard, an economist at investment bank UBS. "Retailers are finding it difficult to make higher prices stick despite the upswing in consumer demand."

The prospect that this favourable background will translate into lower retail price inflation was reinforced by the latest high street survey. The British Retail Consortium reported a 5.2 per cent rise in the value of retail sales in the year to September, down from 6.9 per cent in August.

The survey also showed inflation in retail goods down to 2.1 per cent in September from 3.2 per cent in June. There was no sign that retailers have increase their margins.

The volume of food sales had increased as inflation had fallen, the survey said. Sales were most buoyant in housing-related sectors such as furniture and carpets. Sales of computers, software and video games were buoyant, although other electronic goods were flat after an "exceptional" August.

The prospects for interest rates depend on how long the inflation indicators remain so favourable and on how fast the pace of demand picks up. "The Bank of England lacks the ammunition to push for a rate hike," said Michael Saunders, an economist at Salomon Brothers.

Although yesterday's figures all went Mr Clarke's way, the all-important initial estimate of GDP in the third quarter will be published before the next monetary meeting, due on 30 October. The broad measure of economic activity may point to stronger growth than indicated by figures for the high street alone.

The pound closed slightly higher at DM2.4158 and $1.5795 yesterday.