Inflation falls as clothes prices drop at fastest rate since 1949

Shops and public utilities slashed their prices at the fastest rate on record last year, official figures showed yesterday.

Shops and public utilities slashed their prices at the fastest rate on record last year, official figures showed yesterday.

Savage price wars on the high street and pressure from regulators on the energy, telecoms and water industries helped to drive down the rate of inflation to its lowest level for a quarter of a century.

Clothing and footwear prices fell 3.8 per cent during 2000, the biggest fall since annual records began in 1949. In the previous year, prices fell 2.9 per cent.

The news will come as little surprise to Britain's big name retailers who have suffered a terrible year as a vicious price war inflicted severe casualties.

During 2000, Storehouse sold Bhs, C&A announced plans to shut all 109 stores in the UK and Ireland, and Marks & Spencer said it was closing six stores after reporting another slump in profits. The share prices of the main retail groups plunged almost 12 per cent in 2000. There was more gloom for retailers yesterday when Kingfisher, which owns Comet and B&Q, and the fashion chains New Look and Oasis issued disappointing Christmas trading updates.

Elsewhere on the high street, food prices fell 0.3 per cent, the steepest decline since 1960, while household goods - items such as televisions, hi-fis and home furnishings - fell by 0.9 per cent, also a 41-year record.

Utility prices fell 3.1 per cent mainly due to a new regime imposed by Ofwat, the water regulator, which cut prices by about 10 per cent in real terms.

But there were still signs of inflation in the economy. The surge in the price of crude oil sent petrol prices up 14 per cent. The boom in the housing market meant costs such as mortgage payments, rents, repairs and DIY materials rose 8.9 per cent - the strongest since the peak of the previous boom in 1990. The prices of services rose at their fastest rate for seven years.

But the overall rate of inflation excluding housing costs - the measure the Bank of England uses when setting interest rates - was 2.1 per cent during 2000. Inflation has now stayed below the Government's 2.5 per cent target for 21 consecutive months and these latest figures have improved the odds on a cut in interest rates next month.

Business leaders and trade unions have been clamouring for the Bank to slash rates after the unexpected cut ordered by Alan Greenspan, the head of America's central bank, to avert a recession in the US.

The British Chambers of Commerce, which earlier this month criticised the Bank for keeping rates on hold, said a cut was now urgently needed. "It is necessary to underpin business confidence at a time of growing economic uncertainty," said a spokesman.

But Sir Edward George, the governor of the Bank of England, was cautious about the permanence of falling high street prices. "We cannot be sure of the explanation, nor of how large or persistent the effects will be," he said.