Record inflation fall eases pressure on interest rates

The measure of inflation targeted by the Bank of England plunged to its lowest level since records began a quarter of a century ago, according to official figures published yesterday.

The annual rate of inflation excluding housing costs - known as RPIX - fell from 2.0 per cent to 1.9 per cent last month, its lowest level since 1975. Inflation has now fallen below the 2.5 per cent target for 13 months in a row and the latest drop led to calls for the Bank to freeze or even cut interest rates.

However, headline inflation rose sharply to 3.0 per cent from 2.6 per cent, almost entirely due to the abolition of mortgage tax relief and increases in tobacco duty in the Budget.

The fall in inflation was driven by price cuts for utility services such as water, gas and electricity ordered by the regulators. Overall prices fell 3.4 per cent in April - another record-breaking drop.

This helped push inflation in the booming services sector down to 3.4 per cent, its first fall for over a year. In contrast, goods prices, which actually fell 0.2 per cent in March, rose by 0.3 per cent in April.

Neil Parker, an economist at Royal Bank of Scotland, said: "The sharp pull-back in services inflation and the drop in RPIX both indicate inflation pressures remain subdued." Jeremy Hawkins of Bank of America added: "Unless [today's] earnings data are particularly poor, this will make it very difficult for the Bank to justify another rate hike."

The rise in headline inflation may cause future problems if employees use it as a reason to demand pay rises. Average earnings are running at 6 per cent and are one reason why rates may have to rise again.

Meanwhile, Britain retained its crown as Europe's leading inflation fighter. On the harmonised index used by all EU countries, inflation was just 0.6 per cent compared with 1.4 per cent in Sweden, the nearest rival, and 5.0 per cent in Ireland, the worst performer.