News Column

Food, transport help UK inflation dip to lowest since 2009

June 17, 2014

Bloomberg News

London:UK inflation fell to its lowest rate in four-and-a-half years in May as food and transport costs declined, providing Bank of England (BoE) policy makers breathing space over interest rates.

Consumer prices rose 1.5 per cent in May, the least since October 2009 and down from a rate of 1.8 per cent in April, the Office for National Statistics (ONS) said in London yesterday. That compares to a median forecast of 1.7 per cent in a survey. Inflation has been at or below the BoE's 2 per cent target for six months, the longest stretch since 2009.

The figures buy time for governor Mark Carney as a strengthening economy adds pressure on the central bank to end five years of emergency stimulus. Investors, who were pricing in a January interest-rate increase after Carney said last week that officials might have to tighten policy earlier than anticipated, today pared those bets.

"Given the spare capacity in the economy and the prolonged squeeze on consumers' purchasing power, the pricing power of retailers, manufacturers and services companies will likely remain limited for some time to come," Howard Archer, an economist at IHS Global Insight in London, said before the data were released.

The pound fell against the dollar after the data and was trading at $1.6944 in London, down 0.2 per cent on the day. The yield on the benchmark 10-year UK government bond fell 1 basis point to 2.75 per cent. Sterling Over Night Index Average (Sonia) contracts show investors are betting on a rate increase by February. Before Carney spoke on June 12, bets centreed on the second quarter.

Transport costs

Consumer prices fell 0.1 per cent from April. Pressure came from supermarket price wars that drove down the cost of food and non-alcoholic beverages.

These goods dropped 0.6 per cent on the year, the first annual decline since 2006 and the largest since October 2004.

Clothing prices also fell, as did air and sea transport costs after travel operators raised fares in the run-up to Easter in April.

Air fares declined 3.2 per cent on the month and sea transport plunged 9.9 per cent.

Tuesday's report also showed that retail-price inflation, a measure used as a basis for the inflation-linked bond market, slowed to 2.4 per cent, the lowest since December 2009, from 2.5 per cent. Core inflation slowed to 1.6 per cent from 2 per cent.

In a separate report on Tuesday, the ONS said factory input costs fell 0.9 per cent in May from April. They dropped 5 per cent compared to the same month in 2013.

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Source: Times of Oman

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