Inflation fall boosts rate hopes

HOPES that interest rates may have peaked were given a boost today after official figures revealed a slump in inflation.

The Consumer Prices Index fell to 1.1% in September, down from 1.3% in August, according to the Office of National Statistics. The figure represents the lowest annual price rise in six months and comes against economists' expectations of a 1.4% rise.

'This will reinforce expectations that the Bank need not tighten policy any further,' said Holger Schmieding, economist at Bank of America in London. 'We see UK rates peaking at (the current) 4.75% and expect rate cuts in the second half of next year.'

Under the Bank of England's remit, it would only have to fall another 0.2 percentage point more for Governor Mervyn King to be forced to write a letter to the Chancellor of the Exchequer explaining why it is so low.

The drop in inflation was mainly due to falls in airfares but there were broad declines in other categories as well, particuarly food and telephone charges.

Inflation is now running well below the Government's 2% target, easing the pressure for further rate rises. The Bank of England's monetary policy committee has raised rates to 4.75% from a low of 3.5% last year in a bid to cool the UK's overheated property market and keep a lid on future inflation.

Signs that the house price boom may be over has also increased hopes that the base rate will not be increased again this year and may have already peaked.

However, the decision at the MPC's next meeting will still not be clear-cut. Yesterday a report said prices of goods leaving the factory gate rose at their fastest annual pace in September in more than eight years.

Simon Rubinsohn, chief economist at broker Gerrard, said he expected higher oil prices to filter through to rising inflation in coming months, but he added: 'If one was to look objectively at the recent run of data, it would be easier to make the case for an easing [a cut in rates] rather than a tightening in policy at the present time.'

Airfares and seafares were the biggest drag on CPI growth, as seasonal reductions were greater than a year ago.

Significant downward effects also came from food and communication, in particular increases in the prices of fresh vegetables this September were much lower than a year ago, when supplies had been hit by hot and dry weather. Inflation for telephone services also fell in September.

The Retail Prices Index, excluding mortgages, the measure previously used by the Government, dropped to an annual rate of 1.9% in September from 2.2% in August. It was the lowest since August 2002 and came against expectations of 2.1%.

The wider RPI measure, which includes mortgage interest payments, did not fall as much as the CPI and RPIX as lenders reacted to August's quarter point increase in base rates. The RPI rate only fell to 3.1% from 3.2%.

The figures also had an impact on currencies. Sterling fell to $1.7857 against the dollar. Before the data, it stood at $1.7910.

Against the euro, sterling slipped 0.2% to 68.96p, moving back towards eight-month lows set last week.

Economists are now looking ahead to tomorrow's UK jobless figures and numbers on recent wage rises.

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