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 Tuesday, 21 January, 2003, 21:52 GMT
Surprise drop in UK inflation
Sale at high street retailer Gap
Falling clothing prices edged down inflation
Underlying inflation in the UK staged a surprise drop in December, as higher petrol and housing prices were outdone by cheaper food and clothes.

The Office of National Statistics said underlying inflation, which excludes the volatile effects of home-loan payments, fell to 2.7% in December, down from November's four-year-high of 2.8%.

"It is a little better than expected," said Simon Rubinsohn, chief economist at Gerrard's.

"There have been some substantial, unexpected price discounts on clothes, in particular women's clothes, in the run-up to Christmas."

The statistics office said the surprise drop could be ascribed to widespread discounts on shoes and clothes, while prices for cucumbers, tomatoes and other foods also rose more slowly than during the same month a year ago.

Bank of England

Economists said it was positive to see inflation slowly edging back towards the target of 2.5% set by Chancellor Gordon Brown.

Philip Shaw, economist at Investec, said: "It will alleviate some of the concerns that the Monetary Policy Committee will still be worried about the imbalances in the economy.

"Our guess is the MPC may still cut interest rates in the first half of this year if it appears that High Street activity is cooling."

While underlying inflation slipped, headline inflation - which includes mortgage interest payments - increased to 2.9%, up from 2.6% in November.

The rise, which brings inflation to its highest level since November 2000, was attributed to changes in mortgage interest payments.

'Economy still growing'

The ONS also said that the public finances - or public sector net borrowing - showed a shortfall of 4.5bn pounds last month, giving a deficit so far in 2002/03 of 21.4bn, compared with 5.5bn last year.

The public finances have been deteriorating as government spending on key public services has surged while tax revenues have stagnated because of slowing economic growth.

But economists said the 4.5bn borrowing figure was better than expected and meant Gordon Brown might not bust his forecast of a total of 20bn pounds of borrowing for the year to March.

Mr Brown told BBC News: "Everything that has happened in the economy since November, when I made my last forecast, suggests that economic growth in the last year - that's in 2002 - in Britain may be higher than the forecast.

"And you've seen only in the last week manufacturing output up, you've seen unemployment down, so the British economy is continuing to grow."

Record lending

A report out by the British Bankers' Association on Tuesday said lending rose by 5.1bn in December, down from the 5.8bn rise seen the month before.

"Whether slower mortgage growth in December was because home buyers were backing away from current property prices or whether equity withdrawal is moderating remains to be seen, as one month's figures cannot be viewed reliably as a trend change," said Simon Pitkeathley, executive director of the BBA.

UK house prices boomed by more than 20% last year as Britons took advantage of the lowest interest rates in 39 years.

Figures out by the Council of Mortgage Lenders showed mortgage lending in the UK last year has ballooned to a mammoth 219bn, the highest number ever.

  Chancellor Gordon Brown
"The British economy is continuing to grow"
See also:

17 Dec 02 | Business
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06 Dec 02 | Business
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