Low clothes prices help keep inflation in check

Interest rates are set to remain at a 38-year low for the rest of the year as inflation slipped lower in August, official figures showed today.

In the 12 months to August the underlying rate of inflation, which excludes volatile home loan payments, rose by 1.9%. This compares with a 2.0% increase in the 12 months to July, the office for national statistics (ONS) said.

That was in line with expectations and well below the 2.5% government target. The headline rate of inflation, which includes mortgage payments, rose 1.4% in the 12 months until August, down from 1.5% in the year to July.

The biggest downward effect on inflation came from clothing and footwear, where price recoveries from sales were not as widespread as a year earlier.

Household goods also provided further downward pressure as prices rose by less than last year, due mainly to telephone charges, where there was a higher take up of discount packages this year.

The biggest upward effect came from seasonal food, where prices rose in August compared to a fall last year.

This was mainly due to an increase in the price of unprocessed potatoes following poor weather conditions.

Earlier this month, the Bank of England's monetary policy committee (MPC) held interest rates at 4% for a 10th successive month, reflecting a continuing climate of global economic uncertainty and the slowdown in consumer spending.

The MPC has held the cost of borrowing at a 38-year low since November, following seven rate cuts as the economy slowed during 2001.

With today's figures revealing an absence of inflationary pressure, the odds are that the bank will leave interest rates on hold for the rest of the year. .