Bank predicts decline in inflation

On the eve of the first Inflation Report to be published by the Bank of England since it gained its independence, new figures yesterday suggested that there were few inflationary pressures in industry. Price competition also remained keen on the high street despite a pick-up in retail sales last month.

Eddie George, Governor of the Bank of England, said yesterday that inflation would decline in the coming months. There was a better-than-even chance of meeting the 2.5 per cent inflation target this year, thanks partly to the strong pound, he said.

Fears of a further increase in interest rates in the near future retreated yesterday. However, today's report is likely to indicate that the Bank remains alert to the possibility of the need to raise rates later this year to head off future increases in inflation.

Its last report, in February, showed underlying inflation at 3 per cent and climbing next year. Against the quarter-point rise in base rates since then, many indicators have signalled faster growth in the economy.

But any further base rate moves would occur after the Budget, and after the appointment of outside members to the Bank's new monetary policy committee. Analysts will be on the lookout for a further rise in the rate at which earnings are increasing, especially in the booming service industries, in figures for unemployment and pay due tomorrow.

Yesterday's statistics showed that inflation at the factory gate dropped below 1 per cent last month, while manufacturers' raw materials costs declined by more than 10 per cent in the 12 months to April.

Prices charged by manufacturers rose by 0.2 per cent in the month, to reach a level 0.8 per cent higher than a year earlier. Excluding the effect of increases in excise duties, output prices have barely risen year on year.

Input prices fell 1.9 per cent in April, taking them 10.2 per cent lower than a year earlier. The decline reflects a combination of the strong pound, falling oil prices and weak commodity prices.

The weak price pressures in manufacturing contrast with rising costs in service industries. "Manufacturing will have to deliver price stability in order for us to achieve low inflation for the economy as a whole," said Geoffrey Dicks, chief UK economist at NatWest Markets.

Separately, the British Retail Consortium said the volume of sales on the high street picked up in April.

The annual growth of like-for-like sales rose from 3.7 to 4.1 per cent, and total volumes from 7.1 to 7.4 per cent.

But Andrew Higginson, chairman of the BRC's economic affairs committee, said price competition was keen. "We haven't seen any sign of inflation coming through in the shops," he said.

He said the need for further interest rate increases would hinge on consumers' willingness to spend their windfall gains from free building society shares.

Food, furniture, DIY and mail order saw the strongest sales growth last month, according to the survey.

The pound gained more than 2 pfennigs to end above DM2.76 yesterday after the Chancellor, Gordon Brown, speaking in Brussels, ruled out the pound's re-entry to the exchange rate mechanism.