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Last Updated: Tuesday, 13 February 2007, 10:58 GMT
UK inflation rate lower at 2.7%
Shopping basket full of goods
Interest rates have been rising to curb inflation
Britain's inflation rates eased more than expected in January after hitting an 11-year high in the previous month.

The Consumer Prices Index fell to 2.7% from 3%, according to the Office for National Statistics (ONS).

The Bank of England has raised interest rates three times since August in a bid to bring inflation down to a 2% target.

The main cause of the fall was lower transport costs, while food prices also fell. However, many analysts expect the inflation rate to rise again soon.

While CPI fell to 2.7%, the Retail Price Index (RPI), which is used for most wage negotiations and includes mortgage interest payments, also dropped by more than had been forecast, to 4.2% from 4.4% a month earlier.

Looking forward, it is expected that lower wholesale gas prices could lead to cheaper utility bills in coming months. However, petrol prices climbed slightly in January.

'Relief'

If the rate had increased to more than 3%, as some had feared, Bank of England governor Mervyn King would have had to write a letter to the government explaining the reasons behind the increase.

This is a much more benign set of inflation data than expected, which will be of major relief to the Bank of England
Howard Archer, economist, Global Insight

"This is a much more benign set of inflation data than expected, which will be of major relief to the Bank of England," said Howard Archer, an economist with Global Insight.

While the 3% level was not reached, the latest consumer price inflation figures remained above the government's target of 2%, as has been the case for nine consecutive months.

Interest rates

JP Morgan economist Malcolm Barr said that since inflation was "likely to remain high through the first quarter, and the Monetary Policy Committee (MPC) sensitive to the upside risks to its inflation objective, our forecast anticipates a further move upward in interest rates at one of the next two meetings".

This view was echoed by Global Insight's Mr Archer who said recent evidence showed that service companies, manufacturers and retailers were looking to raise their prices "wherever possible to boost their margins".

"Consequently, we still think interest rates will reach 5.5%, but this should prove to be the peak," he said.

The news should soothe some of the MPC's concerns
Philip Shaw, chief economist, Investec Securities

Philip Shaw, chief economist with Investec Securities said: "The news should soothe some of the MPC's concerns."

But he added that inflation would likely remain "uncomfortably high" until March, when the impact of energy prices would be seen.

The latest figures come after December's rise in consumer price inflation had been echoed by a rise in the RPI to 4.4%, its highest level since 1991.




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