Budget measures could cut inflation to 1.6 per cent

The measures announced in Wednesday's Budget by the Chancellor of the Exchequer could drive inflation down to new lows, Government statisticians said yesterday.

The measures announced in Wednesday's Budget by the Chancellor of the Exchequer could drive inflation down to new lows, Government statisticians said yesterday.

National Statistics said that if all the measures were passed on to consumers immediately, they could cut almost 0.2 per cent off inflation. As inflation is already running at a 30-year low of just 1.8 per cent, this could push the rate as low as 1.6 per cent. This would put inflation just above the 1.5 per cent mark that would compel Sir Edward George, the Governor of the Bank of England, to write an open letter of explanation to Gordon Brown. It is also a stark contrast to Budget 2000, which had the effect of adding almost 0.3 percentage points to inflation

NS said the main impacts were from the measures aimed at motorists, which included cuts in fuel duty and lower Vehicle Excise Duty. But the statisticians warned that, in practice, it was unlikely that all the measures would be passed on in full and at once.

"Changes in fuel and vehicle excise duties usually affect the index immediately, while changes to tobacco and alcohol affect the index over a period of several months as stocks deplete," they said. But economists said the impact of this year's deflationary Budget would be compounded by the fact that Budget 2000 put prices up. Michael Hume, of Lehman Brothers, said the cumulative effect would be to cut inflation by 0.5 per cent and that only a rise in meat prices from foot-and-mouth disease could "save the Governor's bacon".

"With reports already suggesting that prices are falling back, we doubt the effect will last long enough to prevent a letter from the Governor," he said.

Analysts said that while a further fall in inflation would put pressure on the Monetary Policy Committee to cut rates, the real debate would be over the outlook for the global economy. Fears of a prolonged recession in the United States eased yesterday as new figures showed unemployment held steady in February while payrolls grew more than expected.