U.K. Inflation Rate Declined to 3% in January on Fuel
The U.K. inflation rate fell to nine-month low in January after cheaper fuel, food, transport and housing eased pressure on prices as the recession deepened.
Consumer prices rose 3 percent from a year earlier, compared with a 3.1 percent pace in December, the Office for National Statistics said today in London. Prices fell 0.7 percent from December, the most for a year.
Inflation subsided as prices of petroleum, diesel, home rents, cars and air fares declined. With interest rates approaching zero, Bank of England Governor Mervyn King says the bank may have to create money and pump it into the economy to keep inflation from falling too far below the 2 percent target.
“Inflation will certainly fall much further in the coming months,” said Nick Kounis, an economist at Fortis Bank NV in Amsterdam. “Consumer spending is falling sharply and often prices take time to respond to that. It won’t change the Bank of England’s view. We see it taking rates down to zero next month.”
Inflation slipped to the 3 percent upper limit of the government target for the first time since April. Fuel and lubricant prices fell 15.2 percent on the year, the most since records began in 1997. Core inflation, which strips out costs of energy, alcohol, tobacco and food, accelerated to 1.3 percent in January from 1.1 percent in December, the statistics office said.
Early Discounts
The drop in consumer-price inflation was less than economists expected, with upward pressure coming from games and toys, furniture, households appliances and alcohol as retailers limited discounts after slashing prices in December to boost flagging Christmas sales. The median of 31 forecasts in a Bloomberg survey was a rate of 2.7 percent. Taking the two months together, discounting was steeper than in the same period a year earlier.
Sterling rose on speculation the central bank may slow the pace of rate cuts. The pound was at $1.4231 and 88.52 pence per euro at 2:15 p.m in London.
Gross domestic product will contract 3.3 percent this year, the Confederation of British Industry said yesterday payday loans with no fax. From the start of the recession in the third quarter of last year, the economy will shrink 4.5 percent, almost as much as in the early 1980s during Margaret Thatcher’s first term, the group said.
The Bank of England has cut the benchmark rate from 5 percent in October to 1 percent this month, the lowest since the bank was founded in 1694, and King said last week the economy is in a “deep recession.”
Money Creation
The bank, which now has the authority to buy commercial paper from companies under a program financed from the sale of government securities, may now need to increase the money supply by buying government and corporate bonds, King said. Policy makers may consider the decision at their next rate-setting meeting on March 5.
Inflation will slow to 0.5 percent at the end of 2010, the central bank said last week. It breached the 3 percent ceiling last year after a surge in oil prices. The financial crisis has now sparked fears of a sustained fall in prices.
Retail-price inflation slowed to 0.1 percent in January, the lowest since March 1960, from 0.9 percent in December. The fall was largely due to cheaper mortgage costs. Excluding mortgage interest payments, inflation slowed to 2.4 percent from 2.8 percent.
Cheaper oil is easing pressure on inflation. Crude has fallen 75 percent since they reached a record $147 a barrel in July, and fell below $38 this week.
BP Plc, Europe’s second-biggest oil company, on Feb. 3 reported its first quarterly loss in seven years. Randgold Resources Ltd. said Feb. 9 it expects costs to fall further this year as prices for fuel and commodities such as steel decline.
The Bank of England says inflation may prove stronger than policy makers expect if the drop in sterling drives up import prices. The pound has fallen 27 percent against the dollar in the last 12 months as prospects for the economy worsened.