(RTTNews) - U.K. annual inflation slowed in June on fuel prices, suggesting that the central bank will keep the interest rate at the current level well into 2011.
Annual inflation slowed to 3.2% in June from 3.4% in May, data from the Office for National Statistics showed Tuesday. Inflation slowed for the second straight month. Still, the figure is above the central bank's 2% target. Economists were expecting the annual rate to slow to 3.1%.
"The VAT hike in January will prevent inflation moving below 2% early next year, but given the weakness in activity and significant fiscal policy tightening we doubt that inflation will be too concerning for the BoE," said ING Bank NV economist James Knightley.
Falling petrol and diesel prices are by far the main drivers to the downward pressure to consumer price annual inflation between May and June, the ONS said. At the same time, the main upward pressures to inflation were the sharp rises in air fares and increases in insurance premiums. Clothing and footwear prices recorded the biggest drop for June.
On a monthly comparison, the consumer price index, or CPI, edged up 0.1%, slower than 0.2% in May and 0.6% in April. Consensus forecast was for a flat reading.
Excluding volatile food and energy prices, core annual inflation rose to 3.1% from 2.9% in May. It was the highest rate since records began in 1997. The expected rate was 2.8%. The acceleration in core inflation was driven mainly by a sharp fall in air tariffs. Miscellaneous and communication prices also contributed to the increase.
The renewed rise in core inflation will no doubt fuel the concerns of those who believe there to be little spare capacity or that inflation has become less sensitive to slack in the economy, noted Vicky Redwood, an economist at Capital Economics. The slack in the economy will bring down core price pressures more generally over the next few months. "Accordingly, although it could be a tense few months, we still think that a near-term rate hike will be avoided," Redwood added.
The retail price index in June gained 0.2% from the previous month, bigger than the consensus forecast of 0.1%. Retail prices increased at a pace of 5% annually in June, following a 5.1% rise in May. The increase in June was slightly below the expected 4.9%. The main factors affecting the CPI also affected the RPI, the agency said.
Further, the RPIX inflation slowed slightly to 5% from 5.1% in May. Consensus forecast was for 4.9%. The RPIX is the same as the all items RPI except mortgage interest payments, which is excluded from RPIX.
Data released on July 9 showed a drop in U.K. output prices. Output prices dipped by 0.3% on a monthly basis in June, which was the first and biggest monthly drop since November 2008. Output price annual inflation was 5.1% in June, down from 5.5% in May.
To underpin the fragile economy amid severe fiscal consolidation, the Bank of England had left its key interest rate unchanged at a historic low and maintained the size of the quantitative easing at GBP 200 billion on July 8. The BoE/GfK NOP Inflation Attitudes Survey showed that inflation expectations rose to 3.3% in May from 2.5% in February. Inflation expectations for the coming year had hit its highest level since August 2008.
In June, Monetary Policy Committee member Andrew Sentance sought a 25 basis points hike to 0.75%. It was the first time in almost two years that a policy maker voted for a rate increase. The probability of inflation being either materially above or below target in the medium term had increased, the minutes showed.
The central bank is more likely than not to keep interest rates down at 0.50% into 2011 as recovery remains bumpy and gradual with major fiscal tightening and the Eurozone's problems posing serious threats to UK growth prospects, said IHS Global Insight's Howard Archer. The economist also expects quantitative easing to remain at GBP 200 billion for the rest of 2010 and at least the first half of 2011 before starting to gradually reverse the process.
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