Inflation set to fall below Bank target

By Christina Fincher

LONDON (Reuters) - Inflation looks set to fall below the Bank of England's target for the first time in almost two years in June due to falling energy costs and favourable base effects.

Despite the sharpest economic contraction in more than 50 years, inflation has been slower to fall in Britain than in many of its trading partners, largely because of the pound's sharp drop on the foreign exchanges.

Consumer price inflation has been above the central bank's 2 percent target since October 2007, peaking at a series high of 5.2 percent last September.

"We expect further deceleration in June, continuing the delayed reaction to falling food and commodity indices," said Alan Clarke, an economist at BNP Paribas.

The median of economists polled by Reuters is for annual CPI inflation to fall to 1.8 percent in June from 2.2 percent in May.. Annual retail price inflation, a broader measure which includes mortgage costs, is forecast to fall to -1.5 percent from -1.1 percent.

Downward pressure is likely to come from food, where the rate of increase is likely to be considerably smaller than the 2 percent jump seen in the same month last year. Utility bills and air fares are also likely to have had a dampening impact.

Petrol prices rose around 5 percent last month, similar to June 2008, implying little impact on the annual rate.

The outlook for inflation over the next two years will be key to the central bank's decision on whether to extend its asset purchase scheme and when to raise interest rates from their record low.