Dearer petrol pumps up inflation

Dearer petrol and less generous bargains in the new year sales kept the annual inflation rate above the government's 2.5% target for the third month in a row in January, according to government figures released yesterday.

The cost of living excluding mortgage interest payments rose by 2.7% over the 12 months as the growing threat of war against Iraq pushed up energy prices and the sluggish start to Christmas trading forced retailers to bring forward some winter discounts from January to December.

Prices of clothing and footwear fell by 3.8% last month compared with a 5.2% reduction in January 2002. City analysts said there was little sign in yesterday's data from the office for national statistics of retail price competition easing, because last month's discounts followed a surprisingly large 1.8% cut in the cost of clothes and shoes in December 2002.

The Bank of England said in its quarterly inflation report last week that the annual inflation rate was likely to rise further over the next few months as a result of higher motoring costs and the continued effects of rising house prices. It expects inflation eventually to ease back towards 2.5% as crude prices drop and the property market slows.

The all-items retail prices index, the measure of inflation that includes mortgage interest payments, was 2.9% higher last month than a year earlier, again unchanged from December. Using the yardstick designed to compare the cost of living across the European Union, Britain had an inflation rate of 1.4% in December compared with an EU average of 2.2%.

Simon Rubinsohn, chief economist with Gerrard, said inflation was "unlikely to be a barrier" to further rate cuts over the coming months should the economic news remain mixed.

A reduction from 3.75% to 3.5% was in prospect for April or May, he added.