U.K. Inflation Rate Drops to Lowest in Five Years
The U.K. inflation rate dropped in September by more than economists forecast to the lowest in five years as the worst recession in a generation purged cost pressures throughout the economy.
Consumer prices rose 1.1 percent from a year earlier, compared with 1.6 percent the previous month, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 31 economists was 1.3 percent. On the month, prices were unchanged for the first time in a September since records began in 1996.
Bank of England policy makers this month stuck to their plan to spend 175 billion pounds ($276 billion) of newly created money on assets to foster economic growth after five quarters of contraction. The U.K. may not have escaped recession in the third quarter, and the bank should consider buying more bonds to secure the recovery, the British Chambers of Commerce said today.
“Given high unemployment, inflation pressures are subdued,” said Alan Clarke, an economist at BNP Paribas SA in London. “The bank will probably expand quantitative easing, and if they’re going to do it, it will probably be in chunks of 50 billion pounds.”
The pound weakened to 94 pence per euro for the first time since March 27 after the inflation data. It was trading at 93.94 pence at 10:10 a.m. in London. The U.K. currency weakened 0.5 percent to $1.5726.
Utility Bills, Food
The main contributors to slower inflation were utility bills, food prices, and restaurant and recreation, the statistics office said. The 7.3 percent annual drop in prices for electricity, gas and other fuels was the biggest since records began. Transport and clothing costs rose on the year.
J Sainsbury Plc, the U.K.’s third-biggest supermarket owner, reported decelerating sales on Oct. 7 and said revenue growth will become more difficult to achieve as food inflation eases. Tesco Plc, the world’s third-largest retailer, said Oct. 6 that sales growth cooled due to slower food-price inflation low fee pay day loans.
Bank of England policy makers said in the minutes of the September meeting that “inflation would probably be higher in the short-term than the committee had thought a month ago, though it was still likely to be extremely volatile.”
Core inflation, which strips out the cost of tobacco, alcohol, food and energy, was 1.7 percent in September compared with 1.8 percent in August, the statistics office said.
Retail Prices
The retail price index, a cost-of-living measure used in wage bargaining, showed a 1.4 percent annual drop, compared with a 1.3 percent decline in August, the statistics office said. Excluding mortgage interest payments, retail prices rose 1.3 percent on the year.
The Bank of England last week left the key interest rate at a record low of 0.5 percent and said it will spend the remainder of its planned bond purchases. The bank’s forecasts show inflation will probably drop below 1 percent later this year and miss its 2 percent goal in three years.
The BCC said today that the economy may not have exited the recession in the third quarter and that the central bank has room to expand asset purchases to 200 billion pounds next month. The Bank of England’s next decision is Nov. 5.
Quantitative easing may not be enough to revive demand for credit in the U.K., according to Howard Davies, formerly chairman of the Financial Services Authority and deputy governor of the Bank of England.
“The supply is there, the problem is demand,” Davies, now the chairman of the London School of Economics, said in an interview on Bloomberg Television in London today. “The economy is still flat on its back. Business demand for lending is actually quite low. I’m not convinced that keeping on pumping in from the bank side is going to solve that problem.”