Inflation to fall further below target in August

By Christina Fincher

LONDON (Reuters) - British inflation looks set to hit its lowest in almost five years in August as favourable base effects from utility bills and food prices push it further below the Bank of England's target.

Still, price pressures in Britain have been slower to subside than in many other major economies where consumer price inflation has already dipped into negative territory.

Annual inflation fell below the Bank of England's 2 percent target in June for the first time in almost two years and held steady at 1.8 percent in July, surprising analysts who had expected a fall.

The consensus of economists polled by Reuters is for CPI inflation to fall to 1.4 percent in August. ECONGB. Annual retail price inflation, a broader measure which includes mortgage costs, is forecast to fall to -1.5 percent from -1.4 percent.

Downward pressure on prices in August will come from household gas and electricity prices, which leapt in the same month a year ago.

"Base effects from the unusually strong CPI reading a year ago will pull the year-on-year lower in August, on the way to a low around 1 percent in September," said Michael Saunders, economist at Citi.

The Bank of England has blamed the stickiness of inflation on rising import prices following the pound's fall on the foreign exchanges over the past two years. However, it reckons the recession has opened up sufficient slack in the economy to bear down on prices for some time to come.

That was one of the reasons why policymakers opted to raise their asset purchase programme to support the economy by 50 billion pounds last month to 175 billion pounds, as well as keeping interest rates at a record low of 0.5 percent since March.