Budget delivers a low blow

The generosity of the chancellor to drinkers, drivers and smokers in this year's Budget will drive down the rate of inflation over the next two months and could force the Bank of England to explain why it has allowed the annual increase in the main cost of living index to fall so low.

Data published yesterday by the office for national statistics showed that higher petrol prices had helped push the inflation rate excluding mortgage interest payments, the government's preferred measure, up from 1.8% to 1.9% last month.

However, the office for national statistics said the combination of tax changes in the 2000 and 2001 Budgets would act to shave a tenth of a point off the underlying inflation rate in March and a further 0.4 points in April. That would drive inflation excluding mortgages down to 1.4% - its lowest level on record - and require the Bank of England's governor, Sir Eddie George, to pen an open letter giving reasons for inflation undershooting the government's 2.5% target by more than a full percentage point.

City analysts said that although Sir Eddie might enjoy a short-term reprieve as a result of the impact of foot and mouth on food prices, or dearer fuel as a result of production curbs by oil cartel Opec, underlying inflation would fall below 1.5% in 2001 and might drop as low as 1%.