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Sunday, June 13, 1999 Published at 15:46 GMT 16:46 UK

Business: The Economy

UK inflation heading for record low

Shoppers aren't worried by inflation

UK inflation is expected to fall to a record low on Tuesday when the figures for May are released.

Economists are expecting headline inflation to fall to 1.3%, the lowest level since 1963.

[ image: Consumers are keeping up pressure on prices]
Consumers are keeping up pressure on prices
The government's preferred inflation target, the core rate excluding mortgages, is also expected to stay at or under its target of 2.5%.

The continuing fall in inflation could put pressure on the Bank of England to cut base rates further, even though it has just lowered them to 5% last week.

Under the rules laid down by the government, the Bank's Monetary Policy Committee (MPC) must give equal weight to ensuring that inflation does not fall below its target as it does to preventing inflation going too high.

A survey of economists by Idea, a financial research company, suggests that on average they expect rates of 4.75%.

"If the pound stays high the MPC will have to cut rates in order to generate a boom in domestic demand. Otherwise inflation will undershoot," said Michael Saunders of Salomon Smith Barney.

Despite the rate cuts, the pound has maintained its strength against the euro, which has been falling steadily since its launch in January.

Clearer picture may emerge

Next week will see a rash of figures that could give a clearer picture of the direction of the economy.

Producer prices, out on Monday, could sound a warning on future inflation. They are expected to show a slight rise, as oil prices have recovered from their lows over the winter after a series of production cutbacks by OPEC.

Retail sales could show some signs of recovery after the recent weakness reported by the British Retail Consortium.

After falling 0.5% in April by the official measure, some expect them to bounce back by a similar amount in May.

It has proved difficult this year to discern a trend in retail sales after conflicting reports from government statisticians and industry sources.

Unemployment to rise?

Most closely watched will be the latest unemployment figures, published on Wednesday.

So far the UK has escaped a sharp increase in unemployment despite the fall in economic growth to nearly zero.

But analysts are expecting unemployment to begin rising, even as the economy begins to recover.

Firms usually delay laying off workers for as long as possible, making unemployment a lagging indicator of economic conditions.

A slight increase in unemployment could come as welcome news to the Bank of England, who has worried in the past that pressures for higher wages could boost inflation.

But it could make it more difficult for the government to argue that the UK had come through the worst of the recession unscathed.

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