Clarke hails boost to consumer spending

Consumer spending power has received its biggest boost since Nigel Lawson sparked an economic boom in the late 1980s, according to official statistics. The cost of living tumbled in April thanks to the tax cuts announced in last November's Budget.

"The stage is set for a potent upturn in spending," said Kevin Gardiner, an economist at the City investment bank Morgan Stanley.

The tax and price index, the single best indicator of the cost of living, fell 0.9 per cent last month as tax cuts took effect. It rose only 1 per cent in the 12 months to April, compared with average earnings growth likely to be nearly 4 per cent.

The boost to consumers' real disposable income is likely to last for months, helping the pace of growth pick up this year as the Chancellor, Kenneth Clarke, has predicted. Many Conservatives see a consumer boom as their best re-election hope.

Mr Clarke claimed in the House of Commons yesterday: "The average family in this country will be pounds 450 a year better off this year as the combined effect of growing living standards and falling taxation."

Pay adjusted for tax and prices has in the past been one of the best indicators of the strength of retail spending.

The rate of increase in the cost of living has not fallen as sharply since Nigel Lawson cut the basic rate of income tax by 1p to 29p in 1986. Last November Mr Clarke announced a 1p reduction to 24p and increased the lower and higher-rate bands and married person's allowance.

The Government stopped publicising the tax and price index when it started to raise taxes in 1993. It rose faster than headline inflation from the middle of that year until last month.

The headline rate of retail price inflation fell in April to its lowest for more than 18 months, and would have fallen further but for dearer lamb and pork in the aftermath of the beef crisis.

Headline inflation declined from 2.7 per cent to 2.4 per cent, the lowest since September 1994. The drop was due mainly to the disappearance of last April's reduction in tax relief on mortgage interest from the year- on-year comparison, helped by further mortgage rate cuts this year. The underlying target measure of inflation, which excludes mortgage interest payments, was steady at 2.9 per cent.

Prices of some items have fallen during the past 12 months. Clothing and footwear prices were down 1.2 per cent, the lowest rate since July 1953. A sharp drop in premiums on household contents insurance took the cost of household services down 1.1 per cent in the year to April.

The rate of inflation for all services, at 2 per cent, was the lowest since May 1986.

However, food price inflation was 4.8 per cent, having climbed steadily for the past year. Although the price of beef was 2.5 per cent lower than in March, lamb shot up 16.8 per cent during the month, pork 10 per cent and poultry 5.3 per cent. Altogether, meat prices made the headline inflation rate 0.1 percentage points higher than it would otherwise have been.