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Tuesday, 11 December, 2001, 10:33 GMT
UK inflation falls to record low
UK inflation fell more steeply than expected last month, paving the way for further interest rate cuts to stimulate the economy.

Figures from the Office for National Statistics showed that inflation excluding mortgage interest payments fell to 1.8% a year in November, down from an annual rate of 2.3% in October.

"We are looking over the next few months at a very weak world economy and very competitive conditions for prices," said Andrew Smith, economist at accountants KPMG.

"Certainly this won't stand in the way of further base rate cuts."

The inflation rate excluding home loan costs has now reached the equal lowest since records began in 1975.

The latest slide surprised most economists who had been expecting a more moderate dip, to just 2.1%.

Rate leeway

November's figures are well below the government's inflation target of 2.5% a year, giving the Bank of England extra scope to cut the cost of borrowing further without triggering unwanted inflationary pressure.

The Bank has some leeway in its target rate, but is required to explain itself to the Treasury in writing if inflation falls below 1.5% or climbs above 3.5%.

With inflation dipping towards the lower end of that range, the Bank is likely to hold rates low for longer than previously thought, economists said.

"We are looking at a very benign inflationary environment," said Michael Taylor, economist at Merrill Lynch.

"For the next few months goods price inflation is going to be very weak, and that will allow the MPC [monetary policy committee] to cut rates further if the world economy continues to be weak."

However, he warned that once the effect of volatile petrol and seasonal food prices are stripped out, underlying inflation remains steady at about 2%.

Petrol price dip

The Bank has cut rates seven times this year, to a 37-year low of 4%.

A 5% dip in petrol prices, in line with a sharp decline in world crude oil prices, was the main contributor to last month's fall in inflation, ONS said.

Second hand car prices also fell more steeply than expected, ONS said.

However, retail prices are expected to rise in December due to short supplies of seasonal foods and an increase in clothing prices ahead of the January sales.

Mixed signals

The BoE's rate-setting committee left rates on hold at its December meeting despite increased signs that an eight-month contraction in manufacturing output was spilling over into the dominant service sector.

Analysts said the MPC's decision reflected concern over the inflationary impact of persistently high consumer borrowing and spending.

Household expenditure has soared this year due to historically high disposable income and low unemployment, but many economists are now predicting a sharp rise in joblessness in the coming months.

A rise in unemployment would dent consumer confidence and curb spending, reducing the UK economy's overall growth rate.

In October, the UK jobless total edged marginally higher for the first time in 12 months.

 WATCH/LISTEN
 ON THIS STORY
The BBC's Evan Davis
"Not everything is perfect"
The BBC's Darshini David
"Consumers may be spending, but that's not pushing prices up"
See also:

13 Nov 01 | Business
UK inflation holds steady
16 Oct 01 | Business
Sharp fall in UK inflation
18 Sep 01 | Business
UK rates cut to 1960s levels
14 Aug 01 | Business
UK inflation set to fall
17 Jul 01 | Business
UK inflation stays at two-year high
12 Jun 01 | Business
UK inflation hits two-year high
16 May 01 | Business
UK inflation to remain low into 2002
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