Sliding food prices bring UK inflation into target range
July 15, 2009
By Robert Barr London
Britain's inflation rate slowed to an annual rate of 1.8 percent last month, at last falling below the official target for the first time in 20 months, official data showed yesterday.
It was the lowest level for the consumer price index (CPI) since September 2007, when the figure was last below the government's 2 percent target. The CPI rate has fallen every month except once since September's inflation peak of 5.2 percent.
Sliding food prices, particularly for meat, milk and fruit, were the main factor behind the fall last month. A year earlier food costs were rising sharply, the Office for National Statistics (ONS) said.
"This is no one-off," said Jonathan Loynes, the chief European economist at Capital Economics. Given the recent drop in wholesale food prices and lower import prices, "further falls in food CPI inflation are likely over the coming months", he said.
The Bank of England has forecast that the annual consumer inflation rate is likely to fall below 1 percent later this year. Lower prices seem to have encouraged more consumer spending.
In fact, the British Retail Consortium reported that retail sales were up 1.4 percent last month on a comparable basis as warm early summer weather raised demand for summer clothes, outdoor goods and food.
Last month's increase, the third in six months, more than made up for the 0.8 percent fall recorded in May.
Freddie George, a retail analyst at Seymour Pierce, said the June gain was less than robust, considering the weather was more favourable this year.
"In addition several of the department stores started their summer sales early in June, and we believe there has been a higher level of discounting to stimulate sales," he noted.
The ONS said the retail price index - which includes housing costs such as mortgage interest payments and council tax and is used in wage negotiations - fell to a figure of minus 1.6 percent, the lowest since records began in 1948.
Falling mortgage rates were a key factor in dragging the index into negative territory; the Bank of England's key lending rate is now 0.5 percent, compared with 5 percent a year ago.
"A sharp fall in furniture and household goods inflation suggests that the weakness of demand and activity could be starting to bear down on prices in some key high street sectors," Loynes added. "But (it also suggests) that the bulk of the disinflationary effects of the deep recession in the economy have yet to be seen."
Most economic forecasters believe the British economy will continue to contract for some time and that unemployment, already above 2 million, could approach 3 million by the end of the year. - AP
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