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Cheaper petrol helps to ease inflation rate.

Byline: By Graeme Evans

Falling petrol and oil prices helped the annual underlying rate of inflation to ease slightly in May, official data showed yesterday.

The figure, which excludes mortgage interest payments, fell 0.1pc to 2.9pc after spending the previous three months at 3pc. Inflation has now been above the Government's 2.5pc target for seven months in a row. As well as cheaper oil products following the end of the Gulf War, weaker house price rises than a year ago and smaller increases in the costs of foreign holidays than last May added to the downward pressure on inflation figures.

There was also a fall in the Harmonised Index of Consumer Prices (HICP), which Chancellor Gordon Brown said last week he wanted to adopt for the Bank of England's new inflation target.

HICP stood at 1.2pc - the lowest since September - following a fall in the annual rate from 1.5pc in April. The HICP, which is the favoured measure in the euro zone, does not include housing costs and smoothes out fluctuations. Mr Brown sees its adoption as a key part of the UK's preparations for entry to the single currency.

In the retail prices measure, the Office for National Statistics (ONS) said the headline figure, including mortgage interest payments, stood at 3pc, down from the 3.1pc annual rate seen in April.

A further downward effect was created by tobacco prices as the later Budget in 2002 meant duty rises fed through to May prices compared to April this year.

The largest upward effect in yesterday's figures came from seasonal food prices after bad weather affected European crops. Prices of fresh vegetables also fell by less than a year ago.

Economists expect the Bank of England's inflation target, which will be based on the new HICP measure, to be set at 2pc by Mr Brown later this year. That is 0.8pc higher than the current HICP figure and would have resulted in lower interest rates if the new measure had already been adopted, analysts said.

Andrij Halushka, of the Centre for Economics and Business Research, said: "If the Bank of England had HICP as its measure of inflation it would have cut interest rates a long time ago." However, a cut in the cost of borrowing to 3.5pc could still be on the cards next month following today's fall in underlying inflation to 2.9pc, it emerged.

Investec economist David Page believes the Bank now has room to move on rates as inflation is slightly below its own projections. He added: "We think that disappointment over growth will be enough to tip the balance." Analysts now expect the gap between the HICP and the existing inflation rate to close as weaker house price inflation dampens the underlying figure.
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Title Annotation:Features
Publication:The Journal (Newcastle, England)
Date:Jun 18, 2003
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