Price falls raise rate cut hopes

Cheaper petrol and a cooling off in the housing market raised hopes yesterday that Britain's inflation rate has passed its peak, paving the way for a cut in interest rates from the Bank of England to boost the flagging economy.

Steve Nickell, one of the nine members of the rate-setting monetary policy committee, said last night he was more worried about growth than inflation.

"We know that house price inflation is falling, and so can be pretty certain that unless something pretty weird happens to petrol and oil, the inflation rate will fall in the coming months," Mr Nickell said in an interview with Reuters.

Figures from the office for national statistics showed that the government's preferred measure of the cost of living fell below 3% for the first time since January, following a 0.1 percentage point drop in May.

Inflation according to the retail prices index, excluding mortgages (RPIX), is still above Gordon Brown's 2.5% target. City analysts said, however, that the end of war in Iraq and an easing of the pressure from rising property prices pointed to further reductions.

In the City, dealers in both gilts and interest rate futures were betting that the Bank would cut borrowing costs from their 48-year low of 3.75% early next month.

Inflation according to the all-items RPI also dropped back last month, from 3.1% to 3%, while the harmonised index of consumer prices (HICP) showed an annual cost of living increase of just 1.2%, down from 1.5% in April.

Mr Brown said last week that the HICP - an internationally agreed measure - would be used for Britain's inflation target from this autumn, although the government has yet to announce what the target will be.

A breakdown of the RPI showed that motoring expenditure, with petrol down by almost 3p a litre in May compared to a smaller decrease of 0.3p a year earlier, was the biggest single factor in the fall.

In the United States, fears of an imminent slide into deflation were dispelled when core inflation - excluding food and energy - rose 0.3% in April, raising the annual rate to 1.6% from its 37-year low of 1.5%.

Wall Street is still expecting the Federal Reserve to cut rates next week, but analysts said the data pointed to a cut of 0.25 percentage points to 1%, rather than a 0.5 reduction.