UK Inflation Rate Declines More Than Forecast to Five-Year Low of 1.1%
Oct. 13 (Bloomberg) -- The U.K. inflation rate dropped inSeptember by more than economists forecast to the lowest in fiveyears as the worst recession in a generation purged costpressures throughout the economy.
Consumer prices rose 1.1 percent from a year earlier,compared with 1.6 percent the previous month, the Office forNational Statistics said today in London. The median forecast ina Bloomberg News survey of 31 economists was 1.3 percent. On themonth, prices were unchanged for the first time in a Septembersince records began in 1996.
Bank of England policy makers this month stuck to theirplan to spend 175 billion pounds ($276 billion) of newly createdmoney on assets to foster economic growth after five quarters ofcontraction. The U.K. may not have escaped recession in thethird quarter, and the bank should consider buying more bonds tosecure the recovery, the British Chambers of Commerce saidtoday.
“Given high unemployment, inflation pressures aresubdued,” said Alan Clarke, an economist at BNP Paribas SA inLondon. “The bank will probably expand quantitative easing,and if they’re going to do it, it will probably be in chunks of50 billion pounds.”
The pound weakened to 94 pence per euro for the first timesince March 27 after the inflation data. It was trading at 93.94pence at 10:10 a.m. in London. The U.K. currency weakened 0.5percent to $1.5726.
Utility Bills, Food
The main contributors to slower inflation were utilitybills, food prices, and restaurant and recreation, thestatistics office said. The 7.3 percent annual drop in pricesfor electricity, gas and other fuels was the biggest sincerecords began. Transport and clothing costs rose on the year.
J Sainsbury Plc, the U.K.’s third-biggest supermarketowner, reported decelerating sales on Oct. 7 and said revenuegrowth will become more difficult to achieve as food inflationeases. Tesco Plc, the world’s third-largest retailer, said Oct.6 that sales growth cooled due to slower food-price inflation.
Bank of England policy makers said in the minutes of theSeptember meeting that “inflation would probably be higher inthe 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 comparedwith 1.8 percent in August, the statistics office said.
Retail Prices
The retail price index, a cost-of-living measure used inwage bargaining, showed a 1.4 percent annual drop, compared witha 1.3 percent decline in August, the statistics office said.Excluding mortgage interest payments, retail prices rose 1.3percent on the year.
The Bank of England last week left the key interest rate ata record low of 0.5 percent and said it will spend the remainderof its planned bond purchases. The bank’s forecasts showinflation will probably drop below 1 percent later this year andmiss its 2 percent goal in three years.
The BCC said today that the economy may not have exited therecession in the third quarter and that the central bank hasroom 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 forcredit in the U.K., according to Howard Davies, formerlychairman of the Financial Services Authority and deputy governorof the Bank of England.
“The supply is there, the problem is demand,” Davies, nowthe chairman of the London School of Economics, said in aninterview on Bloomberg Television in London today. “The economyis still flat on its back. Business demand for lending isactually quite low. I’m not convinced that keeping on pumping infrom the bank side is going to solve that problem.”
To contact the reporter on this story:Brian Swint in London at bswint@bloomberg.net.
Last Updated: October 13, 2009 05:24 EDTSource: Bloomberg
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