Inflation unchanged at 3%

Britain's underlying inflation rate in April remained unchanged at 3% as weaker oil prices offset a rise in council taxes, official figures showed today.

Underlying inflation, which strips out volatile mortgage payments, rose 0.7% on the month, with the year on year rate holding at 3%. The underlying rate has been constant for the last three months and today's unchanged numbers should give the Bank of England scope to cut rates should the economy show signs of weakness

Philp Shaw, an economist at Investec, described today's news as a pleasant surprise.

There were a number of factors offsetting the large council tax increases," he told Reuters. "In particular, we seem to have pretty subdued goods price inflation once again, despite the weakness of sterling in recent months. It leaves open the prospect of the Bank of England cutting interest rates again if activity indicators remain weak."

Today's number exceeds the government's 2.5% target, but the Bank of England has taken a relaxed view of the current bounce, putting it down to temporary factors. In its quarterly inflation report earlier this month, the Bank of England projected a rise in inflation above its 2.5% target in the short term because of higher council taxes.

Inflation is still expected to drop back slightly below target by early 2004 as moderating house and petrol prices outweigh the inflationary impact of a weaker pound. Subsequently, inflation is expected to edge up to around the 2.5% mark at the two-year horizon.

Today's data showed that service sector price increases, which had been running at close to 5% for some time, slowed to 4.2%, their slowest pace since December 2001.

The slowdown in inflation in the services sector, which accounts for four-fifths of the economy, came mainly from slowing rents and lower shop services prices such as catering and car repairs and maintenance.

Headline inflation, which includes mortgage payments also rose by 0.7% on the month, giving an annual inflation rate of 3.1%. The largest upward effect on headline prices came from housing, mainly due to higher council tax bills.

Rises in water and other charges were partly offset by falls in rent and housing depreciation. The second largest upward effect came from seasonal food, fares and other travel costs. Tobacco contributed a further large upward effect after budget duty increases.

UK inflation has been among the lowest in the EU since the start of 2000. According to the internationally comparable measure of inflation - the harmonised index of consumer prices - UK inflation for the 12 months to April was 1.5%, compared to the EU's average inflation rate of 1.9%.