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Inflation holds firm

16/10/2007

The annual rate of inflation held steady in September, according to official figures which had been expected to show a slight rise.

Analysts had predicted that rising oil costs and food prices would cause inflation to lift last month, but figures released by the Office for National Statistics (ONS) today revealed that it still remains below the Bank of England's two per cent target.

The consumer price index (CPI), the government's preferred measure of inflation, stood at 1.8 per cent in September - unchanged from August's rate.

As such the annual rate of consumer price inflation remains at its lowest level since February 2005, when it stood at 1.7 per cent.

Analysts say the figures will be welcomed by the Bank of England, which until recently had been pursuing a policy of raising interest rates in order to bring inflation under control.

The ONS said falling gas and electricity bills and a lower-than-expected rise in clothing and footwear prices had both helped to keep inflation down in September.

However upward pressure on prices was exerted by the rising cost of dairy products, with the average price of a pint of milk rising by a record four per cent last month.

The price of oil and fats also climbed, with average prices for both margarine and butter increasing by over 15 per cent in September.

Nonetheless price changes to some winter vegetables and tomatoes acted as a downward pressure on food inflation, which partially offset rises elsewhere across the sector.

Official figures show that the retail price index (RPI), another measure of inflation, also fell to 3.9 per cent in September - down from 4.1 per cent in August.

News that consumer price inflation remains below target is likely to fuel speculation that the Bank of England will opt to slash interest rates in the coming months in order to give a boost to the UK's economy in the wake of the ongoing global credit crunch.

But some economists believe the central bank is unlikely to cut the benchmark interest rate before the end of the year, with record oil prices and higher food costs likely to remain an inflationary threat over the new few months.

"We suspect that the bank will only act before the end of this year if it becomes clear that growth is taking a major hit from the credit crunch thereby diluting underlying inflationary pressures," said Global Insight chief economist Howard Archer.