Clarke moves despite inflation setback

DIANE COYLE

Economics Correspondent

The Chancellor's decision to reduce base rates for the second time in two months flew in the face of yesterday's economic statistics. They showed that inflation increased last month, retailers enjoyed a record Christmas and business confidence improved for the first time in nearly two years.

This leaves manufacturing the weakest area of the economy. Figures due next week should fill in the broader picture, with an initial estimate for fourth-quarter GDP and the Confederation of British Industry's detailed quarterly business survey. Growth in the final three months of last year is expected to look subdued, held back by flat manufacturing output.

Increases in excise duties announced in the Budget helped take headline retail price inflation up from 3.1 to 3.2 per cent last month. Inflation excluding mortgage interest payments climbed to 3.0 per cent, compared with its 2.5 per cent target.

Higher duties on petrol and tobacco explained about half of the monthly rise in the retail prices index. However, other components, including household goods and non-seasonal foods such as dairy products and processed meat, contributed to the increase.

The next two months will probably see inflation dip again. There will be less impact from excise duties this January than a year ago, when Kenneth Clarke's mini-budget brought extra increases. Lower mortgage rates will help this month, and the petrol price war from February.

City economists were divided yesterday about inflation prospects further ahead. Kevin Darlington at the broker Hoare Govett said: ''Inflation remains surprisingly stubborn.'' However, James Barty at Deutsche Morgan Grenfell said: ''Despite the inflation upset this month, the general trend remains downward.''

Separate statistics showed that the value of sales set a record in December, reaching a weekly average of pounds 4.2bn. This was 44 per cent higher than the average for the rest of 1995, making it the biggest Christmas boom since the late 1980s. The rate of growth in high street spending reached its highest for a year.

Sales volumes showed an upward trend, increasing 1.7 per cent in the year to December. This was their fastest growth for six months, although lower than in 1994. Figures for earlier months were revised up. The rollover National Lottery jackpot will dent January retail sales, but analysts said the trend was encouraging.

On top of the evidence of a buoyant consumer sector, yesterday also brought the first signs of business cheer. Business optimism rose for the first time in nearly two years in the final quarter of last year, according to a British Chambers of Commerce survey.

The BCC president, Robin Geldard, said: ''These figures point to a better 1996.''

Domestic sales had stabilised and exports were holding up after declining earlier in the year, according to the survey. Although big firms shed staff, there was a sharp rise in reported shortages of skilled labour - a classic warning signal of higher wage increases.