Inflation back on track, but analysts fear spike

Inflation fell back below the Government's target last month, soothing much of the fevered speculation that the Bank of England was about to raise interest rates.

The rate the Bank targets fell to 2.2 per cent in February, unwinding most of the record leap in January to 2.6 from 1.9 per cent. The target is 2.5 per cent.

However, some analysts were astonished that some of the fall was due to a drop in house prices. They warned that inflation could spike up again later this year.

The headline rate, which is frequently used in pay bargaining, dropped to 1 per cent from 1.3 per cent.

"This confirms that the January spike was a significant aberration," said Ray Attrill, research director for the online analyst 4castweb. "It makes us slightly more comfortable with our current call for the first [rate hike] in August."

According to National Statistics the fall in inflation was spread across the economy. High street prices fell back in February after signs in January that retailers had used the bumper Christmas and New Year sales as an excuse to mark up their goods.

The largest impact came from clothing and footwear, where prices fell at the fastest annual rate for almost a year.

Overall, goods prices hardly rose. Leisure goods and personal goods both exerted a downward pressure.

The measure of core inflation, which excludes volatile components such as petrol, food, drink and tobacco, fell back to 2.6 per cent from January's worrying 3.0 per cent.

However, some economists said the volatility of the index made it hard to determine whether inflation was truly anchored below the target. "These numbers have become so erratic they are starting to make me dizzy," said John Butler at HSBC. "Despite this good number inflation is unlikely to trough at the 1.6 per cent predicted in the Bank's inflation report."

Observers were baffled with a fall in the housing component of the index, which took 0.2 percentage points off underlying inflation.

NS said the measure was based on spending rather than nominal prices, adding that it was heavily weighted to London where there had been price falls at the top end of the market.

This contrasts sharply with the latest Halifax report showing prices rising at the fastest rate since 1989, and Monday's warning from the Royal Institution of Chartered Surveyors that prices would rise further.