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Tuesday, 12 September, 2000, 09:41 GMT 10:41 UK
UK inflation at record low

Underlying inflation in the UK - the figure targeted by the Bank of England - fell to a record low of 1.9% in August.

That was the lowest figure since the government began compiling the data in 1975, and well below its 2.5% target.

The headline rate of inflation also fell to 3.0%, compared to 3.3% in July.

Meanwhile, the pound has been falling on foreign currency markets, reaching a 14 year low against the dollar. It was trading at just under $1.40, a rate last seen in 1986.

Foreign currency dealers are convinced that, with inflation under control, the Bank of England won't need to raise interest rates again.

That makes it more attractive to invest in dollars, where interest rates are 6.5%, rather than in the UK, where interest rates are at 6.0%.

Lower petrol prices

Ironically, the main reason for the decrease was a fall in the cost of petrol, which fell compared to the sharp increases that occurred one year ago, when the first effects of the oil price rise were beginning to be felt.

The National Statistics office said that petrol prices were likely to increase again in September.

But downward pressure on prices also came from seasonal foods, although clothing and footwear prices recovered after falling in the summer sales.

The measure of inflation used by other European countries, the harmonised index of prices, which excludes taxes and housing costs, also fell to a record low of 0.6%, the lowest in the EU.

The underlying rate of inflaton has now been below its target for seventeen months.

Rates on hold

The low rate of inflation has led the Bank of England's monetary policy committee to keep interest rates unchanged for the last seven months at 6.0%.

One of the factors that has helped keep inflation in check has been the high pound, which has lowered the price of imports - although it has also hurt manufacturing exports.

Some economists warned that the Bank could still raise interest rates later in the year.

"I think it provides a justification for continuing to hold interest rates because there is that margin of safety between actual and targeted inflation. But we still think the MPC will raise interest rates one more time before the end of this year," said Michael Taylor of Merrill Lynch.

One reason may be the further pressure that could be put on prices by the falling pound.

In the longer term, the pound's weakness against the dollar could increase inflation, as imported goods from the United States will become more expensive.

However, as long as the euro continues to be weak, the effect on inflation is likely to be limited, as the UK imports more from the EU than anywhere else.

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See also:

12 Sep 00 | Business
Pound plunges against the dollar
11 Sep 00 | Business
Company profits squeezed
15 Aug 00 | Business
Inflation steadies in July
06 Sep 00 | Business
UK factory output slows
07 Sep 00 | Business
No change in UK rates
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