Sharp fall in UK inflation

The headline rate of UK inflation, which includes mortgage interest payments, fell last month by 0.4 of a percentage point to 1.7%.

It is encouraging that inflation is back below target after August's disappointing numbers

Mike Taylor, Merrill Lynch

The underlying rate fell by 0.3 of a percentage point to 2.3%, just below the government's target level of 2.5%, the Office for National Statistics said.

The fall, which follows a surprisingly sharp rise in inflation in August, will add to pressure for further cuts in interest rates.

The stock markets reacted positively to the news, which was in line with expectations.

London shares pushed higher in midmorning trade, with the FTSE 100 index up 44.4 points at 5,112.4.

Falling prices

Statisticians credited last month's inflation fall largely to a drop in petrol prices and reduced mortgage payment, following the Bank of England's decision to cut interest rates on 2 August.

Last month's cut in interest rates, from 5% to 4.75%, has yet to show up in the ONS figures.

Falling food prices, spurred on by a supermarket price war, and leisure costs, with lower than expected increases in the price of foreign holidays, added to the downward pressure, according to the ONS survey.

Tuesday's inflation figures are likely to maintain pressure on the Bank of England for further cuts in interest rates.

'Encouraging'

Mike Taylor, of Merrill Lynch, said: "They (the figures) were in line with expectations.

"It is encouraging that inflation is back below target after August's disappointing numbers."

He added: "It is slightly encouraging for further rate cuts, though I think the [Bank of England] would have been prepared to cut even if inflation was at or slightly above target as they did in late 1998/early 1999.

"The fact that it is below target gives them a little bit more comfort."

'Relief for markets'

Stuart Edwards, of Standard and Poor's, in London, said: "It is no surprise we have come below target.

"I guess a little bit of relief for the markets still."

He highlighted that the Bank of England's monetary policy committee, which sets interest rates, looks at the inflation picture up to two years ahead.

"Nonetheless it gives the doves on the committee more flexibility, stronger arguments to push for lower rates if need be," he added.

"Another 25 basis points is on the cards in the near future. Whether that will come as soon as the November meeting, I am not sure."

International rate cuts

Matthew Taylor MP, Liberal Democrat Treasury spokesman, said: "Inflation clearly remains very low while manufacturing has been in recession for some time, and other sectors are at risk of the same.

"This can be best tackled by continuing international reductions in interest rates and government action to tackle the overvaluation of sterling."