January 19, 2016 / 9:37 AM / 2 years ago

UK inflation was zero in 2015 despite December lift

LONDON (Reuters) - British inflation edged up to an 11-month high in December after a spike in airfares, but prices for 2015 as a whole were flat for the first time since records began in 1950, putting the Bank of England under no pressure to raise rates.

Consumer prices rose by 0.1 percent on the month to take December’s annual inflation rate to 0.2 percent, its highest since January 2015, official data showed on Tuesday.

For 2015 as a whole, inflation averaged zero, down from 1.5 percent in 2014 and the lowest reading since comparable records began in 1950, the Office for National Statistics said.

The data is the latest to suggest the BoE will be able to take its time before raising interest rates for the first time in almost a decade, particularly as wage growth is slowing and a weak global economy is weighing on British output.

The public will get a fresh insight into the BoE’s economic outlook at 1200 GMT, when Governor Mark Carney makes a speech in London. Last week central bank policymakers said a new plunge in global oil prices to their lowest in 12 years would only be a slight drag on inflation, and should boost British growth.

Sterling rose and British government bonds fell after the data release, but the move was short-lived.

“We believe it is pretty unlikely that the Bank of England will raise interest rates until at least August given the increased probability that inflation will stay lower for longer,” said Howard Archer, chief UK economist at IHS Global Insight.

Christmas shoppers in Carnaby street in walk beneath festive decorations in London, Britain, December 23, 2015. REUTERS/Peter Nicholls

The rise in consumer prices in December was driven by a 26.8 percent annual increase in airfares, the largest annual rise since 2011. The ONS said the move was driven by long-haul flights and could reflect different return dates used compared with the previous year.

Economists said this effect could easily unwind next month, though some, such as Pantheon Macroeconomics’s Samuel Tombs, did see signs of an underlying rise in general prices.

“CPI inflation will continue to rise in early 2016, as the drag from lower oil prices continues to fade and food inflation begins to strengthen now that supermarkets have passed on all of the fall in wholesale prices,” Tombs said.

British inflation has hovered near zero since early 2015, boosting the spending power of consumers that have spearheaded Britain’s economic recovery but remaining far below the Bank of England’s 2 percent target.

The central bank is now expected to raise interest rates only in the third quarter of this year, according to a Reuters poll last week of economists, who a month ago had pencilled in a move in the second quarter of 2016.

An ONS measure of core consumer price inflation, which strips out changes in the price of energy, food, alcohol and tobacco, also rose to an 11-month high of 1.4 percent compared with economists’ expectations for it to hold at 1.2 percent.

Services price inflation rose at its fastest pace since September 2013, up 2.9 percent on the year. Factory gate prices dipped 1.2 percent -- the smallest drop in a year, and in line with economists’ forecasts in a Reuters poll.

The ONS also released figures for November house price inflation, which showed an 7.7 percent annual rise across the United Kingdom as a whole compared with 7.0 percent in October -- the biggest increase since March.

Editing by Catherine Evans

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