Inflation comes tumbling down: Drop in housing bills cuts rise in cost of living to 1.3% but City is sceptical about further falls

THE ANNUAL rate of inflation tumbled to 1.3 per cent last month, the lowest level since February 1964.

The decline of 0.6 percentage points was greater than expected, and was almost entirely due to the introduction of council tax bills, which were lower than the average poll tax bills a year earlier. The bills fell partly because of increased grants from central government to local authorities.

The slide in housing costs also helped to cut the Treasury's preferred measure of inflation, which excludes mortgage interest rates, by 0.6 points, to 2.9 per cent: that was the lowest for the underlying rate of inflation since records began in 1975, and left the measure well within the Treasury's target range of 1 to 4 per cent.

However, City analysts doubted that inflation would fall further, since prices did not ease apart from seasonal foods such as fresh fish and spring vegetables. Indeed, inflation excluding all housing costs was the same as last month, at 3 per cent. City analysts considered therefore that any new cut in interest rates is unlikely. They say most of the good news on inflation may now be over, and the rate is likely to edge gently upwards over the next few months.

Norman Lamont, the Chancellor, yesterday brushed aside any suggestions that interest rates could fall again, saying: 'We have had substantial cuts in interest rates; the effects of those have been feeding through.'

However, Mr Lamont said the latest inflation figures - which placed Britain second lowest in the EC after Denmark - would help to underpin recovery. 'With inflation well below the average in the European Community and unit wage costs falling, British firms are becoming more competitive overseas. Britain is now firmly in the ranks of the low-inflation economies. This time we must make sure we stay there.'

The latest inflation figures followed the news that the key measure of UK manufacturing competitiveness has improved more quickly than at any time since the 1960s. In the three months to March, manufacturing industry's unit labour costs - the amount spent on wages and salaries for each unit of output - were 2.9 per cent below the levels of a year earlier.

But Gordon Brown, Labour's Shadow Chancellor, said the underlying rate of inflation was likely to rise during the rest of the year. 'Just about everything the Government has been doing over these last few months - devaluation which forces prices up, the VAT rise which forces prices up, even considering prescription charge rises which would force prices up - is contributing to a higher level of inflation in the long run.'

Alan Beith, Treasury spokesman for the Liberal Democrats, said that while the figures were very welcome, they had been badly distorted by the change from poll tax to council tax. 'People who will soon be paying 17.5 per cent more on their fuel bills will not be impressed to learn that most prices are only going up by a little over 1 per cent.'

Mr Brown's warning was partly supported by yesterday's figures. Inflation rates for goods with a high import content crept up, albeit slowly. Household goods inflation was up to 1.8 per cent from a recent low of 1.3 per cent. Clothing and footwear inflation ran at 0.8 per cent in April compared with a low of minus 1.1 per cent in December.

Even the Bank of England forecast this week that the underlying rate of inflation would edge back up to 3.5 per cent by next month, although it expected the rate to stay within the target range over the next 18 months.

However, the Bank did warn that higher import prices and the extension of VAT to domestic fuel and power bills risked breaching the target some time in 1994. Moreover, the recent fall in wage settlements may end, and may even be reversed eventually, if unemployment has peaked and is set for a protracted decline.

But Central Statistical Office officials said they have found little direct evidence in the inflation figures of last autumn's depreciation of the pound, aside from higher prices of imported food like beef, dairy products and sugar-based goods, such as confectionery.

Last month's retail price index rose by 0.9 per cent - pushed up by higher excise duties, announced in the March Budget, and increased motoring costs. Prices for clothing, household goods and leisure also rose but prices for seasonal food fell by 2.8 per cent - the largest April fall since 1956.

The Government's tax and price index, which measures the gross income needed to stabilise living standards after allowing for price and tax changes, rose by 1.3 per cent over the year to April, compared to 0.7 per cent in March, reflecting Budget tax increases.

There will be an even larger increase next April when the extension of VAT to domestic fuel and power bills takes effect.

Officials said prices of fresh fish, home-killed lamb, beef, dairy and sugar products and tobacco may rise in the next few months.

Pressure on inflation may also increase as last year's cuts in mortgage rates fall out of the annual comparison.

Prices of household goods, clothing and footwear may also go up as new stocks arrive.

By contrast, minor cuts in electricity prices lie in store.

Portillo 'misleading', page 2

Savings rise, page 17

Money, pages 20 to 23