UK inflation slows most in 3 months on spendings

UK inflation unexpectedly slowed in June for the first time in three months as Bank of England Governor Mervyn King repeated his view that price growth will ease to the bank’s target in two years.

Consumer prices rose 4.2 per cent from a year earlier, the Office for National Statistics said today in London. That compares with 4.5 per cent in May, which was also the median forecast of 30 economists in a Bloomberg News survey. On the month, prices fell 0.1 per cent, the first decline between May and June since 2003. Core inflation also eased.

Slower inflation may ease pressure on the Bank of England, which is tolerating price growth above its two per cent target to aid the economic recovery. Britons are seeing their spending power erased at the fastest pace since the 1970s as wage growth fails to keep up with prices and the government implements the biggest budget cuts since World War II.

“We are still going to see inflation rise later this year, but it may now not be as sharp as we thought,” said George Buckley, chief economist at Deutsche Bank AG in London. “It has reduced the pressure on the bank of England, but inflation is still substantially above their target and will rise further.”

The pound fell as much as 0.4 per cent against the dollar after the data were published. It traded at $1.5807 as of 9.42 am in London, down 0.6 per cent since yesterday.

CONSUMER CONFIDENCE
The easing of inflation on the year was led by lower costs for recreational goods such televisions, DVDs, digital cameras and toys. UK consumer sentiment fell more than economists forecast last month, a report by GfK NOP Ltd. on June 30 showed.

The monthly decline in prices was led by clothes and recreational and culture items such as toys and computer games, the statistics office said.

So-called core inflation, which excludes costs of energy, alcohol, food and tobacco, slowed to 2.8 per cent in June, the weakest since November, from 3.3 per cent in May.

Retail-price inflation, a measure of the cost of living used in wage negotiations, eased to five per cent in June, the lowest level this year, from 5.2 per cent. That compares with the median forecast of 5.2 per cent in a Bloomberg News survey of 20 economists. Excluding mortgage costs, RPI eased to five per cent from 5.3 per cent.

KING’S DEFENCE
King has in recent weeks defended policy makers’ decision to keep the benchmark interest rate at a record low of 0.5 per cent, saying temporary factors are behind the surge in inflation. Consumer-price growth accelerated to the highest since 2008 in May.

While a weaker pound, rising commodity prices and a sales- tax increase pushed up inflation, “the most likely outcome is that these factors will not continue to push up the price level in the future,” King wrote in a foreword to the central bank’s annual report released in London yesterday.

The British economy probably grew just 0.1 per cent in the second quarter from the previous three months, the National Institute for Economic and Social Research said last week.

The economy stagnated over the fourth and first quarters.

In a separate report today, the statistics office said the UK trade deficit on goods widened to £8.48 billion ($13.4 billion) in May from £7.64 billion in April. The median forecast of 15 economists in a Bloomberg News survey was a shortfall of £7.3 billion. While exports rose 4.2 percent on the month, they were outpaced by imports, which jumped 5.8 per cent. The total trade gap widened to £4.06 billion from £3.14 billion.