Inflation on track as key prices fall sharply

PRICES OF consumer goods, including shoes, clothing and hi-fi equipment have fallen sharply over the past 12 months according to official figures published yesterday.

The sharp fall in prices of some key goods helped keep UK inflation on target in November for the fourth consecutive month, despite continuing inflation in the services sector.

The underlying rate of inflation targeted by the Bank of England was 2.5 per cent in November, unchanged from October's rate, the Office for National Statistics (ONS) said.

The headline rate, which includes mortgage interest payments, fell by 0.1 per cent to 3 per cent, the lowest since June last year.

The breakdown of the inflation figures, showing some prices falling, increases the pressure on the Bank of England's Monetary Policy Committee (MPC) to cut interest rates again in January.

Michael Saunders, UK economist at Salomon Smith Barney/Citibank, said: "We estimate that goods prices have not been as weak for at least 30 years. Looking ahead, we suspect that the MPC's fears of higher inflation in 1999 will prove misplaced."

Prices of clothes and shoes have fallen by 1.5 per cent over the last 12 months, the sharpest fall for 45 years, reflecting the tough trading conditions on the high street. The last time clothing and footwear prices fell by this much was in July 1953, the ONS said

Prices of women's clothes and children's clothes have been under particular pressure. According to ONS figures, prices of both women's outerwear and children's outerwear fell by 3 per cent in the twelve months to November.

Dharshini David at HSBC Securities said: "This ties in with the picture of weak retail sales in November, and suggests nervous consumers are likely to prevent high street retailers from successfully rebuilding margins in all high street sectors over the coming months".

Mr Saunders said: "Retailers have reported weak clothing sales in recent months, and it is no surprise prices continue to weaken."

Rising seasonal food prices was the main reason inflation did not fall below target, economists said. Prices of seasonal food such as fresh fruit rose by 0.6 per cent in November.

Over the last 12 months, food prices have risen by 1.8 per cent, according to the ONS, the highest rate of food inflation since October 1996. Soft drink prices - which have risen by 5 per cent - were the primary reason for the increase in the 12-month rate.

Goods inflation continued to languish at record lows, reflecting the weakness of Britain's manufacturing and retail sectors. Prices rose by just 1.1 per cent in the 12 months to November, unchanged from October, and the lowest rate in the series' 11-year history.

Services inflation continues to outstrip goods inflation, and rose by 0.1 per cent to 3.5 per cent. However, economists believe services inflation will soon start to tumble, as the slowing domestic economy takes its toll. November's figures reveal that price increases are already slowing in some parts of the service sector, such as catering.

Ms David said: "As it is now clear that activity is softening in all sectors, it can only be a matter of a few months before services inflation starts to ease".