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Tuesday, March 23, 1999 Published at 10:03 GMT


Business: The Economy

UK inflation beats the target



The UK's annual inflation rate has dropped below the government's target of 2.5% to its lowest level in more than four years.

The figures provide further evidence that the UK economy is slowing down sharply and boost hopes that interest rates will be cut again next month.

Many retailers have been forced to cut prices in an effort to maintain flagging sales as customers hold onto their cash.

The annual underlying rate of inflation has fallen to 2.4% in February, according to official figures from the Office for National Statistics. Prices rose an average of just 0.2% during the month.


Economist Roger Bootle: These figures exaggerate true level of inflation
The headline rate in inflation - which includes mortgage costs - has fallen to its lowest level since late 1993.

Successive cuts in interest rates in recent months have lead to sharp falls in mortgage costs, sending the headline rate of inflation down sharply from 2.4% from 2.1%.

Welcome news

The fall in underlying inflation was warmly welcomed by UK Chancellor Gordon Brown.

"I think today's announcement of 2.4% inflation, which is the best figure since 1994, shows that over the years we will meet our inflation target and are continuing to steer a course of stability in a difficult and troubled world," he told a Commons Treasury Select Committee.

However trade unions and employers immediately called on the Bank of England to cut rates next month to avoid further job losses.

Roger Lyons, the general secretary of the Manufacturing Science and Finance Union, said the latest figures add to an economic picture which threatens to see the "fragile flame of manufacturing snuffed out".

"We need a 1% cut in interest rates in April," Mr Lyons said.

Room for rate cuts

The Bank of England's brief is to adjust interest rates so that inflation stays as close to 2.5% as possible.

The fall in the retail price index that measures inflation, which is now to be called the consumer price index, could be enough to prompt another cut in rates.


[ image: Lowest rate of price increase in five years]
Lowest rate of price increase in five years
The Bank has reduced rates recently in order to kick-start the UK economy and head-off a recession. But many City analysts believe that the cost of borrowing will have to fall further to prevent inflation slipping further below the target and to boost faltering economic growth.

Bank America economist Jeremy Hawkins said the figures show the retail marketplace is very competitive and keeping a lid on prices: "Quite clearly retailers are finding it difficult to raise prices and be able to sustain those prices at the new levels."

The latest inflation figures come against a background of flat retail conditions and economic growth grinding to a halt.

Shoppers still appear nervous about parting with their cash - with retail sales falling last month. And the value of the goods and services the country produced is growing at its slowest rate for almost seven years - with total output rising just 0.1% in the last three months of 1998.

Interest rates have already been cut for five times in six months and now stand at 5.5%.





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