UK inflation falls to 4 1/2-year low in May, but house prices soar

LONDON Tue Jun 17, 2014 12:01pm 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) - British inflation slumped to a 4 1/2-year low last month but house prices surged in April, according to data that clouded the view for Bank of England policymakers gauging Britain's economic recovery.

Consumer price inflation dropped to 1.5 percent in May from 1.8 percent in April, its lowest since October 2009, after the first year-on-year fall in food prices since 2006, the Office for National Statistics said on Tuesday.

That undershot all forecasts in a Reuters poll of economists, who had expected a decline to 1.7 percent.

But separate data from the ONS showed house prices soared 9.9 percent in April, their biggest annual rise since June 2010, heightening concern that a bubble may be developing in the property market.

"The divergent data will further complicate the discussion about the appropriate timing of the first increase in interest rates from their current record low," said Chris Williamson, the chief economist at Markit.

The Bank of England's Financial Policy Committee meets on Tuesday and is widely expected to take steps to curb the risks to financial stability from rapidly rising house prices and high levels of debt.

Sterling fell against the dollar and the euro after the data. Government bond futures reversed losses in early trade.

While Britain's economy has been growing at a rapid pace, low inflation has allowed the BoE to keep interest rates at their record low 0.5 percent.

But that could change before the end of the year. BoE Governor Mark Carney said last week that rates might rise sooner than markets had previously expected, though for now Britain's economy still had room to grow without pushing up inflation.

David Miles, who sits on the Monetary Policy Committee with Carney, said in an interview published on Tuesday that interest rates have a strong chance of rising before next May. Minutes from the MPC's June meeting will be released on Wednesday.

"Although we doubt that there will have been votes for higher rates, we expect tomorrow's minutes will echo some of what Miles had to say yesterday, and make the Carney speech appear more representative of the committee as a whole," said Malcolm Barr, economist at J.P. Morgan.

FOOD AND FARES

The ONS said inflation in May was subdued by the first year-on-year drop in food prices since 2006, as well as lower clothing prices and cheaper air and ferry fares. Food prices fell by 0.6 percent on the year, which the ONS said may have been caused by a price war between major supermarkets.

But while prices are falling for some household essentials, the central bank is likely to be concerned about rapidly rising house prices, which in London rose 18.7 percent on the year. Excluding London and the south east, house prices were 6.3 percent higher.

Finance minister George Osborne said on Thursday that he would grant the Bank of England new powers to impose maximum loan-to-value and loan-to-income ratios on mortgage lending - a step that the BoE's Carney welcomed.

Data released alongside the CPI by the ONS on Tuesday showed that factory-gate inflation in May rose by 0.5 percent on the year, slowing from 0.6 percent in April.

(Editing by Larry King)

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