Inflation fall fuels rate cut hopes

Click to follow
HOPES THAT Kenneth Clarke will push through another cut in interest rates to offset his tax increases were boosted yesterday as the Government's target measure of underlying inflation tumbled to its lowest rate in more than 26 years.

Retail prices rose by 2.3 per cent in the year to March, compared with 2.4 per cent in February, according to figures released by the Central Statistical Office.

Prices for household goods, clothes and footwear rose as new spring ranges reached the shops, but did not regain the levels seen before the winter sales. The prices of petrol and household services dropped, with inflation for the service sector reaching a record low. Food prices are now rising at their slowest rate for a decade.

The headline inflation rate was prevented from dropping further by a cut in mortgage rates a year ago, which dropped out of the annual comparison of prices. The Government's target measure of underlying inflation - which excludes mortgage interest payments - dropped from 2.8 per cent to 2.4, for the first time coming within the 1 to 2.5 per cent target range for the end of the parliament set after Britain left the European exchange rate mechanism in September 1992.

The CSO said this was the lowest figure since the underlying inflation series began in 1975, and probably the lowest on any comparable basis since November 1967. The City had expected underlying inflation to fall only to 2.6 per cent.

The Treasury conceded, though, that the imposition of VAT on fuel and cuts in the value of mortgage tax relief could push underlying inflation up next month. The CSO said a rise in council tax levels would also exert upward pressure on prices. Future prospects for inflation depend on whether the boost to inflation from tax increases is incorporated in pay settlements and, in turn, in companies' costs.

John Marsland, economist at UBS, predicted that the headline inflation rate would leap to 2.8 per cent next month while the underlying rate would rise to 2.6 per cent.

Prices rose by 0.3 per cent in March, compared to 0.4 per cent in the same month last year when the pound's devaluation pushed up the prices of imported goods. March's 0.6 per cent rise in food prices contributed about a third of the rise in the overall price level. These rises were offset by lower prices for spectacles and telephone charges.