UK inflation falls less than expected in January

Inflation fell much less than expected last month, official data showed yesterday, but the surprisingly strong figures should not stand in the way of further monetary policy easing from the Bank of England.

Higher prices for alcoholic drinks and retailers making smaller than usual price cuts in the New Year sales after big reductions in the run-up to Christmas meant CPI inflation fell only a tenth of a point to three per cent. Analysts had predicted 2.7 per cent.

That was also still some way above the Bank's two per cent target but the central bank is still forecasting inflation in the to slow dramatically in the months ahead and is widely expected to cut interest rates again.

"We still expect the Bank of England to cut interest rates further in March, most likely by a further 50 basis points which will take them down to a new record low of just 0.5 per cent," said Howard Archer, economist at Global Insight.

"Further out, we expect interest rate to come down to a low of 0.25 per cent in the second quarter, and we certainly would not rule out them coming down all the way to zero."

The RPI measure of inflation, on which most wage deals are based, is already flirting with negative territory. It fell to just 0.1 per cent, the lowest since 1960 as it, unlike the CPI measure, was pushed down by the big drop in mortgage costs.

Most of the upward pressure on inflation last month came from items like games, toys, furniture, household appliances, clothes and shoes where retailers had slashed prices very aggressively before Christmas.

Consequently, the scale of the January discounting was shallower than normal. Package holidays also had an upward effect, perhaps a result of the weaker exchange rate.

Sterling has fallen sharply in recent months, which should push inflation up. But the Bank reckons the scale of the spare capacity in the economy should mean that inflation is likely to remain below the two per cent target for the next two years.

Alcoholic beverage prices are rising, however, at their fastest annual rate since March 2001. Government statisticians said the increases were widespread and include prices of wine, beer and spirits.

Separate government figures yesterday showed house prices fell 10.2 per cent on the year in December.