UK inflation rate falls further than expected

Britain's inflation rate unexpectedly fell even further below its 2 per cent target last month as clothing prices failed to recover after the new year sales, official figures showed yesterday.

The Office for National Statistics said the consumer price index rose by just 1.3 per cent on a year earlier, down from 1.4 per cent in January. Analysts had predicted inflation would remain steady.

Interest rate futures ticked higher as dealers reckoned the surprise fall would make it harder for the Bank of England to justify the widely expected rises in interest rates in the months ahead.

But policymakers have always said they set rates based on the outlook over a two-year horizon and most analysts expect the Bank of England will raise interest rates again in the next couple of months to rein in roaring consumer spending and house prices.

"The figures are consistent with Bank of England projections - the monetary policy committee will now be looking closely at demand in judging whether to raise rates. We see a quarter-point hike in May," said Mr Philip Shaw, chief economist at Investec.

The Bank of England raised interest rates last month for the second time since November, taking them up a quarter-point to 4 per cent.

Members of the monetary policy committee may be somewhat relieved to see that, despite signs of strong demand through the Christmas period and the new year, retailers seemed unable to lift prices for clothing after the sales.

The Office for National Statistics said clothing and footwear prices were the main culprits for the slowdown in inflation in February, as retailers continued special offers, particularly on women's clothing, while menswear prices didn't rise as much as normal.

There were also price falls for items such as toys, garden products and photographic equipment, the latter perhaps as digital cameras, which keep getting less expensive as the months go by, were included for the first time in the index.

But in an indication of the continued strength in the housing market, home furniture prices rose strongly after the new year sales. The price rises were at the fastest annual pace since March 2002.