Inflation dips to record low

Prospects of a rise in interest rates receded today as inflation fell to its lowest level on record, government figures showed today.

A fall in the cost of motoring, seasonal foot and clothing and footwear helped cut the underlying rate of inflation, excluding mortgages, by 0.3% to 1.5% in June, its lowest level since records began 27 years ago, the office of national statistics (ONS) reported. Economists had been expecting the underlying rate to dip by a marginal 0.1%. The headline rate, which includes mortgage interest payments, fell by 0.1% to 1%.

The June rate is a full 1% below the government-set target of 2.5%, and raises the prospect of Bank of England Governor, Sir Edward George, having to write a letter of explanation to the government in coming months if inflation falls below 1.5%. Under its mandate, the Bank is obliged to set interest rates to meet a 2.5% inflation target.

With inflation so low, there is considerably less pressure on the Bank's monetary policy committee to raise interest rates from their 38-year low of 4%. It had been widely expected that the Bank would take a pre-emptive move in August, but there now seems little justification to raise the costs of borrowing when inflation is so tame. With confidence in the market shattered, the Bank will be doubly reluctant to raise rates.

"You can all but rule out a rate move in August. These are very good numbers and not just the headlines," George Buckley of Deutsche Bank told Reuters. "I think Eddie George is quite lucky that it did not go below 1.5% and force him to write a letter to the chancellor. But we think this is the low point and we see underlying inflation rising to about 2% over the next few months. We think inflation will be higher for July than June."

Other measures of inflation underlined the downward trend in price pressure. ONS said the all-items inflation rate - which includes mortgage interest payments - was flat in June, to stand 1% higher than a year ago, the lowest since December 2001.

Meanwhile, the harmonised index of consumer prices, which measures the cost of living across Europe, rose by 0.6% last month, down from 0.8% in May, comfortably the lowest in the EU. All-goods inflation slipped to -1.6% in the year to June, the lowest since records began in January 1987.

In the breakdown, the ONS said seasonal food prices plunged 4.8% on the month to stand 14.1% lower than a year ago, the biggest annual drop since March 1997. Clothing and footwear fell 1% percent on the month to stand 5.9% lower than a year ago, the biggest annual drop since the series began in June 1947.