PRODUCER price inflation in Britain fell to its lowest rate for a decade last month, leaving Mr Kenneth Clarke, the chancellor, in a strong position to resist Bank of England pressure for an increase in interest rates.

The data came yesterday ahead of the Bank of England's quarterly inflation report, due out tomorrow which is expected to warn that underlying retail price inflation - which excludes mortgage interest rates - is in danger of exceeding government targets.

The prices of goods leaving factory gates rose at an annual rate of 1.5 per cent in January compared with 1.7 per cent in December, the Office for National Statistics said. It was the smallest annual increase since October 1986. Input prices - the cost of materials and fuel to manufacturers - fell 6.3 per cent in the year to January, due largely to the strength of the pound.

Mr Clarke is now expected to leave base rates unchanged at 6 per cent until after the election, in spite of pressure from the Bank and from within the Treasury for a rise in rates of at least a quarter of a percentage point.

Mr Clarke's position will be strengthened today by the latest survey by the British Retail Consortium, the shops' trade association. It shows trade in Britain's shops gathered momentum last month but with few signs of inflation. It reports that British retail sales values grew at an annual rate of 4.9 per cent last month.

"The weather is set fair for our inflation outlook," Mrs Angela Knight, Treasury minister, said yesterday.

City economists also greeted the producer price data as good news for the economy.

The underlying measure of factory gate inflation, which excludes food, beverages, tobacco and petroleum, showed prices rose at an annual rate of 0.6 per cent in January, the lowest rate of increase since August 1967. Input prices fell a seasonally adjusted 0.5 per cent between December and January.