Rate hope as inflation hits 38-year low

Homeowners last night looked set for new year cuts in mortgages after official figures showed plunging petrol prices last month pushed inflation to its lowest level since the height of the Profumo scandal in the summer of 1963.

A four pence a litre fall in the average price of petrol at the pumps, triggered by a collapse in the global oil price, was the main factor behind a sharp drop in the headline rate of inflation from 1.6% to 0.9% in November, according to the latest retail prices index.

The scale of the decline took the City by surprise, with analysts forecasting that inflation could fall further in the coming months as the impact of the worldwide economic downturn forces prices lower.

"The weaker inflation numbers suggest that a rate cut early in the new year remains on the cards, particularly if [today's] unemployment figures show clear evidence we have reached a turning point in the labour market," said Ciaran Barr, chief UK economist at Deutsche Bank.

Yesterday's data from the office for national statistics showed that the government's preferred measure of inflation - which excludes mortgage interest payments - also fell heavily, from 2.3% to 1.8%, equalling its lowest level since the series was started in 1975.

Since the start of the year, the Bank of England has cut interest rates seven times, but was coming under pressure last night for further reductions over the coming months to boost demand and push prices higher.

The Bank is required to keep inflation to the 2.5% target set by the chancellor, Gordon Brown, and to treat any undershoot of the target as seriously as an overshoot.

"The figures show that the Bank's recent rate cuts have done nothing to stoke up inflation," said John Monks, general secretary of the TUC. "They leave room for the Bank to continue cutting and to bring some seasonal cheer to Britain's hard-pressed manufacturers."

In the immediate aftermath of the terrorist outrages on September 11, oil prices rose to more than $30 (£21) a barrel, but since then the oil cartel Opec has been powerless to prevent falling demand forcing the price to less than $20 a barrel. In addition to cheaper fuel, the ONS said previous cuts in mortgage rates, and lower prices for secondhand cars and seasonal food had also contributed to the decline in inflation.

Price pressures have been abating across the west in recent months in response to the first synchronised recession in the world's three largest economies - the United States, Japan and Germany - since the 1970s.

However, the strength of sterling has meant that the UK continues to have the lowest inflation rate in the European Union. Measured on a comparable basis, the UK's inflation rate of 1.2% is half that of the 12 countries in the eurozone, the ONS said.

Although the government prefers to use the inflation rate excluding mortgages for the conduct of economic policy, analysts said that the all-items headline rate was still widely in use by pay bargainers.

Officials said that the last time it was below 1% was in July 1963.

Statisticians said that the basket of goods the government used to represent the purchases of the ordinary household in 1963 included such items as nylon shirts, lard and plastic macs.