'Vegetables are saving Clarke's bacon'

Inflation slowed last month thanks to a big fall in vegetable prices, but it was not quite enough to give the Government the pleasure of claiming it had finally hit its 2.5 per cent inflation target.

Kenneth Clarke, Chancellor, said: "Britain's economy is booming while inflation stays well under control." The Conservatives had achieved the longest period of low inflation for half-a-century, he said.

But shadow chancellor Gordon Brown accused the Government of failing to meet its own target. "The Prime Minister and the Chancellor both promised they would hit their inflation target of 2.5 per cent or less by the end of the Parliament but they have failed to do so," he said.

Meanwhile, Malcolm Bruce for the Liberal Democrats predicted that the boom would end in bust.

Headline inflation declined from 2.7 to 2.6 per cent, while the underlying target measure, which excludes mortgage interest payments, fell from 2.9 to 2.7 per cent.

The main reason for the slowdown was a sharp drop in the price of seasonal foods during March.

They tumbled by 2.6 per cent to a level 15.6 per cent lower than a year earlier, thanks to the effect of mild weather on the vegetable crop.

Potatoes, for instance, have fallen 45 per cent in price during the past 12 months. Greens like cauliflowers, lettuce and cucumbers are one- fifth cheaper than a year ago.

As Simon Briscoe, economist at the Japanese bank Nikko, put it: "It is a case of vegetables saving Clarke's bacon."

The strong pound has also helped trim the price of imported foods.

Other items, especially high street categories like household goods and clothing and footwear, jumped unexpectedly. "Cost inflation is still tumbling but retailers are also trying their luck with prices," said John O'Sullivan at NatWest Markets.

The pace at which the price of services is rising held steady at 3.3 per cent last month. However, a pick-up in wages in the services sector is likely to set service price inflation back on its year-long upward trend.

Some City experts believe the inflation threat is overblown. "Not for the first time people in the markets and the media are getting scared about inflation quite out of proportion to the situation on the ground," said Roger Bootle of HSBC Markets.

But most found worrying signals in yesterday's figures. Simon Briscoe, one of the few analysts to have been arguing that the economy is not booming enough to justify higher interest rates, admitted yesterday: "It looks as if the stronger demand in the high street has prompted retailers to raise prices."

Most economists think there is a good chance underlying inflation will hit the 2.5 per cent target, briefly, at some point this year. This will be the first time since the end of 1994 that it has done so.

However, an increase in interest rates remains on the cards after the election because the economy is expanding fast enough to drive inflation up again later this year.

The financial markets expect base rates to be a percentage point higher at 7 per cent by the end of this year.