Inflation fall raises hopes for rate cut

Inflation slowed to its weakest pace in five months in November thanks to falls in the price of petrol and air tickets, raising hopes that interest rates could be cut again early next year.

But gas and electricity prices surged at their fastest pace since 1983 as limited supplies of gas and fears of a cold winter pushed up energy prices.

The Office for National Statistics said the consumer price index last month stood 2.1% higher than a year ago, down from 2.3% in October and the weakest rise since June. It was also within a whisker of the Bank of England's 2% target, having peaked at 2.5% as recently as September.

Mervyn King, governor of the Bank, has made it clear that the monetary policy committee is reluctant to cut interest rates again because inflation had risen sharply over the past 18 months in line with surging oil prices. The Bank is worried that this could lead to higher wage demands, potentially triggering an inflationary spiral, although there is no sign of that happening at present.

Petrol prices fell by an average of 3.6p a litre last month in line with a general fall in oil on international markets. The average price at the pumps in November was 90.1p for a litre of unleaded and 94.4p for diesel. Oil prices have since risen, however, meaning petrol prices could move higher again soon.

The ONS also reported that air ticket prices fell faster last month than they had in November last year, contributing to the fall in overall inflation. So-called "core" inflation, which strips out volatile petrol and food prices, fell back to just 1.5%, its lowest since June. Other measures of inflation fell back too. The retail price index - still used as a basis for pay settlements - fell to a three-year low of 2.4% while RPIX, which excludes mortgage payments, slowed to 2.3%.

But the overall good news on inflation was overshadowed by big rises in energy costs. Gas prices were 17.5% higher than last November and electricity 11.7%. Both are the highest figures since early 1983.

David Page, economist at Investec bank, said he was encouraged by the slowdown in inflation: "We believe that this will help quell some of the central bank's inflationary concerns going into 2006. However, large increases in gas prices over the month suggest that risks to inflation from higher energy prices have not disappeared."

James Knightley, at ING, thought the sluggishness in much of the economy could encourage the Bank of England to cut interest rates from their current 4.5%. "If growth remains below trend, as we suspect it will in the coming months, then this could offer the BoE room to cut interest rates as early as February."

The ONS also released research showing that consumer prices are 25 times higher than they were in 1947. House prices have been the biggest mover, standing 50 times higher than they were after the second world war while clothing and footwear prices are just six times higher than they were then. The most rapid rise in prices came during the 1970s. Inflation peaked at 26.9% in August 1975.

The ONS also released figures showing inward investment by foreign firms in Britain jumped to £30.7bn last year, up by £20.4bn from 2003. The biggest increase came from Europe, especially Germany.