Inflation stays below target

The headline rate of inflation fell to 2.9% in December compared to 3.1% in November - the lowest rate since March 2000. The main reasons for the fall were petrol prices, dropping in December by a penny a litre for unleaded on the back of falling crude oil prices, and mortgage payments which were also slightly lower than a year ago.

The government's preferred measure - the underlying rate of inflation which excludes mortgage payments - was 2% for December, compared with 2.2% a month earlier. This measure of inflation is also used by the Bank of England's Monetary Policy Committee (MPC) in its deliberations on interest rates and has set a target rate of 2.5%.

The inflation rate has now stayed well below the MPC's target rate for 21 months and, for the year as a whole, underlying inflation has averaged 2.1%, the lowest rate since 1976.

The news will add to pressure on the bank to cut interest rates, although the January meeting of the MPC kept interest rates at 6% - the same level since February 2000.

Forecasts for underlying inflation average 2.3% in the final quarter 2001 rising to 2.4% in the same quarter 2002.