Inflation falls in April, giving more leeway for stimulus

LONDON Tue May 21, 2013 11:15am BST

1 of 2. Fuel pumps are seen at a Shell petrol station in London May 15, 2013.

Credit: Reuters/Luke MacGregor

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LONDON (Reuters) - Inflation fell twice as fast as expected last month, giving incoming Bank of England governor Mark Carney more leeway to support the economy with more stimulus should the recovery weaken.

Inflation eased to 2.4 percent from 2.8 percent in March, with almost half of that drop coming from weaker petrol and diesel costs. The pound fell and British government bonds rose after the figures.

Combined with recent signs that the economy is gaining traction, the easing in price pressures will be welcome news for Carney. The Canadian, who replaces Mervyn King at the helm of the Bank in July, has a reputation for monetary activism and has stressed the importance of the economy achieving "escape velocity" before stimulus is withdrawn.

Britain's economy grew 0.3 percent in the first quarter of this year and surveys suggest it has picked up pace since.

The government has tweaked the mandate of the central bank - which aims for inflation of 2 percent - to make it easier to justify tolerating above-target inflation for the sake of economic growth.

"It looks as though the economy will be growing moderately and inflation will not be quite as high as the (bank's) Monetary Policy Committee fears. That will certainly make Carney's life easier," said Philip Shaw, economist at Investec.

"It is a welcome drop in inflation that should give the MPC more flexibility to restart the asset purchase programme if they want to give more stimulus."

Britain's central bank bought 375 billion pounds of British government debt between March 2009 and October 2012 to stimulate the economy but has more recently switched its attention to credit easing measures, such as its Funding for Lending scheme to try to revive credit to households and businesses.

BENIGN OUTLOOK

Inflation has been above the central bank's target since the end of 2009. Statistical effects are likely to cause a tick higher over the summer but the recent weakness in commodity prices and slow earnings growth suggest the longer-term outlook is benign.

Core inflation, which strips out volatile factors such as food, eased to 2.0 percent from 2.4 percent, its weakest rate since late 2009.

The government welcomed the data. "This is good news for families and businesses. Inflation is down by more than a half from its peak," the finance ministry said in a statement.

Wage growth has been running at less than half the rate of inflation for much of the past five years, eroding Britons' living standards.

Separate data on producer prices mirrored the picture of easing price pressures. Annual factory gate inflation slowed to 1.1 percent in April from 1.9 percent in March, its weakest rate since September 2009.

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