Sterling's slide helps push inflation rate into first rise for 10 months: Retail price figures support pound as central banks come to defence of French franc

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The Independent Online
THE DEVALUATION of the pound helped push the annual rate of inflation higher in February for the first time in 10 months, the Central Statistical Office said yesterday.

The retail price index rose 1.8 per cent in the year to February, up from 1.7 per cent in the year to January. The rate was slightly higher than City forecasts and further dampened hopes of an early interest rate cut. Underlying inflation - excluding mortgage interest payments - rose from 3.2 to 3.4 per cent, well below the Chancellor's 4 per cent target ceiling.

The rise in inflation prompted a fall in gilts prices, reinforced by the announcement that pounds 2bn- pounds 4bn of new stock would be auctioned at the end of the month. The 9 per cent gilt due in 2008 fell 21/32 of a pound to pounds 107 3/8 .

The currency markets were less affected. The pound fell against a strong mark, but rose against the dollar. Sterling rose 0.1 points against a basket of other currencies to 79.3 per cent of its 1985 value, its highest since interest rates were cut on 26 January.

The strong mark kept up the pressure on the French franc in the European exchange rate mechanism, prompting the Bank of France and the Bundesbank to intervene in its support. The franc closed barely 2 centimes from its ultimate floor against the German currency.

The acceleration in inflation was largely due to higher prices for food, petrol, leisure goods and clothes. Food prices rose 1.1 per cent, the largest rise since April 1991. Imported food is more expensive because of the devaluation of the 'green pound', the exchange rate used to calculate the sterling price of goods covered by the EC common agricultural policy.

February's 0.7 per cent rise in prices followed a fall of 0.9 per cent in January, which reflected generous discounts in the new year sales. The arrival of new ranges is expected to put further upward pressure on prices in the next couple of months.

January's cuts in mortgage rates will cut the RPI by about 0.3 per cent this month. Budget rises in excise duties will add about 0.5 per cent in April, but this will have little impact on the annual inflation rate. The freezing of personal tax allowances means that the inflation rate may begin to underestimate the increase in pre-tax income required to compensate for higher prices.

City economists on average expect the inflation rate be around its 4 per cent target ceiling in the fourth quarter, but forecasts differ widely. Peter Warburton, of Robert Fleming, expects 5.2 per cent. He argues that the Budget forecast that underlying inflation will remain below 4 per cent is 'too good to be true'. But Don Smith, of Midland Global Markets, expects 3.25 per cent, with the headline rate falling to 1.1 per cent in May or June.

(Graph omitted)

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