Inflation rise seen as no obstacle to QE

LONDON Tue Sep 13, 2011 1:50pm BST

Fruit and vegetables are seen for sale in Soho's Berwick Street Market in central London May 17, 2011. REUTERS/Paul Hackett

Fruit and vegetables are seen for sale in Soho's Berwick Street Market in central London May 17, 2011.

Credit: Reuters/Paul Hackett

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LONDON (Reuters) - The biggest rise in utility bills in two years and record hikes in clothing and furniture prices pushed up inflation in August, but the increase is unlikely to deter policymakers from injecting more stimulus to shore up the ailing economy.

The Office for National Statistics said consumer prices rose 0.6 percent last month, taking the annual inflation rate up to 4.5 percent from 4.4 percent in July, in line with analysts' expectations.

Inflation has been above the Bank of England's 2 percent target for almost two years, but price pressures have mainly been driven by oil and commodity prices and a hike in sales tax last year -- effects which the central bank expects will wane.

In its latest quarterly projections, the BoE forecast inflation would rise to 5 percent later this year, but subside quickly over the next two years, as one-off effects fall out of the data and economic growth remains weak.

Indeed, a raft of recent data suggest Britain's economy is struggling to gain momentum, having barely grown since last September, while a weakening global economic outlook threatens to tip the nation back into recession.

Trade data published at the same time showed British imports rose faster than exports in July, widening the goods trade deficit and boding ill for politicians' hopes that exports will fill the gap left by public spending cuts.

Such concerns have fuelled expectations that the BoE will restart its programme of buying assets with newly created money -- or quantitative easing -- by the end of this year. It is also expected to leave borrowing costs at their record low 0.5 percent for at least another year.

Long-standing BoE dove Adam Posen, who has been voting for additional stimulus for almost a year, repeated his call for the central bank to embark on more QE and suggested the BoE and government should work together to boost credit to small and new businesses.

"It is clear that if the central bank does act anytime soon, it will be to try to stimulate economic activity through more quantitative easing," said Howard Archer, economist at IHS Global Insight. "This is looking ever more likely to occur as the flow of weak economic data and surveys continue."

HOUSEHOLD BILLS CLIMB

The ONS said the main driver for the pick-up in inflation was a 5.1 percent annual rise in the housing, water, electricity and gas component. This was the biggest rise since July 2009 and reflected price hikes of almost 20 percent by some utility companies which came into effect in August.

Analysts said the August data will not have captured the full extent of the increases, and so could also drive up September's inflation reading.

"Those increases represent another shock to households' disposable incomes, which will put consumer spending under more pressure in the third and fourth quarter of 2011," said David Tinsley, economist at BNP Paribas.

In addition, the clothing and footwear, furniture, and restaurants and hotels components rose at their fastest annual rates since records began in 1997.

The retail price inflation gauge, which includes more housing costs and is the benchmark for many wage deals, picked up more than expected to 5.2 percent, versus a forecast rise of 5.1 percent.

Separate data published by the ONS on Tuesday showed Britain's goods trade deficit with the rest of the world widened unexpectedly to 8.922 billion pounds in July, against forecasts for a modest narrowing to 8.50 billion pounds, and the trade deficit with non-EU countries narrowed slightly less than expected to 5.505 billion pounds.

"There is precious little sign that exports are outpacing imports to provide the boost to growth that the UK economy so badly needs," said Colin Ellis, chief economist at the British Private Equity and Venture Capital Association. "For now, rebalancing is still on hold."

(Editing by Catherine Evans)

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