Heavy discounts in high street keep the lid on inflation

High street retailers embarked on their most savage pre-Christmas price cuts for more than a half a century last year, official figures showed yesterday.

High street retailers embarked on their most savage pre-Christmas price cuts for more than a half a century last year, official figures showed yesterday.

The price of clothes and shoes tumbled by 1.8 per cent in December taking the annual fall to 4.7 per cent, which were both the steepest drops since modern records began in 1947.

It follows widespread anecdotal evidence that last Christmas was the weakest festive trading period for a decade.

John Butler, UK economist at HSBC, said: "It illustrates the competitive nature of this sector and its intention to match any weakening in demand with aggressive price discounting."

The fall was enough to push the inflation rate that the Bank uses when setting interest rates down to 2.7 per cent, from November's 2.8 per cent.

However, this means inflation was above the Government's 2.5 per cent target for the second month in a row, as rising oil prices fed through into dearer petrol.

The headline rate, which will be used in the key January pay bargaining round, jumped to a two-year high of 2.9 per cent from November's 2.6 per cent.

The single largest upward effect was mortgage costs, which rose because of an increase in the average mortgage debt as Britons borrowed against the inflated value of their homes.

There seems little sign of a major slowdown in the housing market, according to the Council of Mortgage Lenders, which reported yesterday that homes loans hit an all-time high of £219bn in 2002 despite a slight slowdown in December.

Economists said the inflation data would not have a huge influence on next month's rate decision in the light of Monday's admission by Sir Edward George, the Bank's Governor, that inflation would stay above target "in the near term".

"There is nothing here to prompt the Monetary Policy Committee to cut rates," Michael Saunders, at Citigroup, said. He added that the next move would be up unless there was a sign of a sharp housing slowdown.

Ken Livingstone, the Mayor of London, moved to play down fears of an imminent house price crash in the capital although he admitted yesterday the local economy was going through a "sticky patch".

"Some of the heat has come out of the housing market," he said. "Prices are still rising but not as dramatically as before. We do not anticipate a fall." He said job losses in the City of London had had an impact on the economy to a much lesser extent than in any of the similar episodes over the past 25 years.

The slowdown in the financial services industry is also threatening to knock the Chancellor's forecasts for public finances. The Government had to borrow £11.4bn in December, about £1bn ahead of forecasts. That puts the year-to-date cumulative total at £23bn, against predictions of £20bn. Outlook, page 21