UK inflation drops sharply

The UK’s annual inflation rate dropped sharply and unexpectedly in June to 2.4%, the lowest since November 2009, as fuel prices fell and clothing retailers started their summer sales early.

Inflation in the UK, as measured by the consumer price index, has come down sharply from a peak of 5.2 per cent in September as global commodity prices have dropped.

Vicky Redwood, an economist at Capital Economics, said inflation’s fall was in part driven by a spate of clothing discounts amid rainy weather. “Nonetheless, we think that evidence is tentatively building that weak activity and large amounts of spare capacity are bearing down on underlying price pressures,” she said.

“We still think that CPI inflation could be below 1 per cent by the end of the year – and is likely to stay very low throughout next year.” Annual inflation measured by the alternative retail price index, which includes a measure of housing costs, fell from 3.1% in May to 2.8% in June.

The official data come after the Bank of England resumed its quantitative easing programme to try to inject some life into the economy, a decision the Monetary Policy Committee made after deciding inflation was not as sticky as it had feared.

“The MPC will feel vindicated that it re-engaged in QE on the basis of these data,” said Alan Clarke, an economist at Scotia Capital.

Clothing and footwear prices fell 4.2 per cent between May and June, which was twice as large as the next biggest fall between these two months since records began. Summer sales started earlier than last year, the ONS noted. One exception was the price of football shirts which rose sharply during the European championship tournament.

Transport prices fell 0.5 per cent between May and June compared with a rise of 0.3 per cent in the same period a year ago. Fuel prices fell for the second successive month, with petrol prices down 4.3p to £1.33 a litre and diesel prices down 4.7p to £1.39 a litre.

Economists expect the coalition government’s decision to delay a planned August rise in fuel duty to shave another few percentage points from the annual inflation rate.

Food prices fell 0.1 per cent between May and June compared with a rise of 0.9 per cent a year ago. Meat prices fell especially quickly, with the ONS noting that poor weather had hampered demand.

“Admittedly, the recent rise in oil and food commodity prices indicates that the pace of [inflation] declines will slow, but the weak corporate pricing power environment still suggests we should be expecting sub-2 per cent inflation readings well before the end of the year,” said James Knightley, an economist at ING.

So-called “core inflation”, which strips out volatile food and fuel prices, dropped from 2.2 per cent to 2.1 per cent.

Source: Sarah O'Connor - FT.com
http://www.ft.com/cms/s/0/c4004a34-cff0-11e1-a3d2-00144feabdc0.html#axzz20tDVzc1F