Inflation figures disappoint experts

An increase in the target measure of inflation last month has reduced Kenneth Clarke's room for manoeuvre on interest rates ahead of the election.

Although the Chancellor insisted in his speech to the Conservative Party conference yesterday that inflation was on course to meet the Government's target, City experts said yesterday's figures were disappointing.

"Target inflation close to 2.5 per cent by the spring is a possibility, but the latest figures hint at the longer-term outlook," said Kevin Darlington, UK economist at Hoare Govett.

There was some reassurance about potential inflationary pressure from a survey showing high street sales growth was a bit more moderate last month. The Confederation of British Industry reported that retail sales volumes grew strongly but not at August's distinctly overheated pace.

On the other hand, retailers expect business to pick up again next month. The orders they have placed with suppliers matched July's increase, the biggest since mid-1988.

The headline rate of inflation was unchanged at 2.1 per cent in September following a 0.5 per cent rise during the month.

The September figure is used to uprate benefits such as pensions. Others, such as housing benefit and family credit, will be increased by an alternative price index which excludes rent, mortgages and council tax. This edged up to 2.6 per cent.

Sally Greengross, director general of Age Concern, said: "Low prices are good news, but this means the pension for an older couple will still be less than pounds 100 a week from next April."

Lower mortgage rates and a steep fall in seasonal food prices helped keep headline inflation steady in the face of higher costs for clothing and shoes, petrol and household services such as school fees and conveyancing charges.

These increases took the rate of retail price inflation, excluding mortgage interest payments, the target measure, up to 2.9 per cent from 2.8 per cent. It was its first increase since last December.

Motoring costs rose 1.5 per cent in September due to higher petrol prices and a rise in the price of second-hand cars. Rising crude oil prices and the fading of the forecourt price war are likely to keep the pressure on petrol prices.

Clothing and footwear prices jumped 5.2 per cent, the biggest monthly rise since records began in 1947. The arrival of the new season's fashions, especially in women's clothes, saw the price of some items rise by 10 to 30 per cent.

"This suggests that, with consumer demand beginning to strengthen, retailers are using this opportunity to widen their margins," said Simon Briscoe, an economist at investment bank Nikko. But he said the pressure on prices would be limited by consumers' insistence on value.

The CBI's survey supports this, showing a significant slowdown in the growth of sales volumes reported by clothes retailers. The other sharp slowdown was in sales of durable household goods, despite a smaller rise in their price on the high street last month than last September.

The balance of retailers reporting higher rather than lower sales volumes was 46 per cent, down from 53 per cent in August although well above the levels of the spring. The underlying trend remained unchanged at a very robust 47 per cent.

Orders placed with suppliers rose between August and September, from a balance of 35 per cent to 38 per cent. The balance reporting more than adequate levels of stocks to meet demand fell to the lowest recorded since the survey began in 1983, at only 8 per cent.