Council tax rises block fall in inflation rate

A record increase in council tax bills last month has prevented a fall in inflation that might have opened the door to a cut in interest rates.

Official figures yesterday showed inflation would have fallen in April were it not for the impact of the 12 per cent rise in council tax. The annual headline rate of inflation was unchanged at 3.1 per cent as the tax hike offset falls in petrol and foreign holiday prices, the Office for National Statistics said.

The rate targeted by the Bank of England was unchanged at 3.0 per cent, meaning it has been above the Government's 2.5 per cent target for six months in a row. But the European-style harmonised index of consumer prices (HICP) rate - which Gordon Brown is considering adopting to pave the way for eventual euro entry - fell to 1.5 per cent.

The largest upward factor on inflation was housing, where prices rose 8.6 per cent year on year, adding 0.15 percentage points to the inflation rate. The largest component within that was the increase in council tax, which was the steepest since the levy was introduced.

Jonathan Loynes, the chief UK economist at the analysts Capital Economics, said: "Inflation would have fallen were it not for the 12 per cent rise in council tax in April." Matthew Taylor MP, the Liberal Democrat Treasury spokesman, said: "Higher council tax bills are making it more difficult for the Bank of England to cut interest rates."

Forecasters in the City had expected a further rise in inflation and the underlying picture from yesterday's figures boosted hopes of an eventual rate cut. Inflation for goods prices slowed to 0.1 from 0.3 per cent in March while services inflation slowed to a 16-month low of 4.2 per cent.

Phil Shaw, the chief UK economist at Investec, said there was little evidence of a spike in inflation from the weaker pound and scant signs of deflation. "An easing in services inflation helps prospects for a return to the target in due course and should enable base rates to be brought down once more," he said.

Analysts also focused on the HICP measure.According to recent speculation Mr Brown might replace the current 2.5 per cent target with a 2.0 per cent objective under HICP, which is currently half a percentage point below that level.