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Inflation slows but still uncomfortable for Bank
July 13, 2010 / 8:34 AM / 7 years ago

Inflation slows but still uncomfortable for Bank

LONDON (Reuters) - Falling petrol prices pushed British inflation down for a second month running in June, but underlying pressures rose and inflation over the quarter was higher than the Bank of England expected.

A petrol pump is seen at Tesco's in Leeds, northern England, June 25, 2010. REUTERS/Nigel Roddis

Speaking shortly after the data came out, Bank policymaker Andrew Sentance repeated his call for interest rates to rise gradually but there are still few signs that other members of the Monetary Policy Committee back his view.

The Office for National Statistics said annual consumer price inflation eased to 3.2 percent last month from 3.4 percent in May, after prices rose 0.1 percent on the month. Inflation has been above the Bank’s 2 percent target since December.

Many economists had anticipated a sharper decline and gilts fell and sterling rose on the news. Core inflation -- which strips out volatile energy and food prices -- unexpectedly rose to 3.1 percent, its joint highest on record, raising fears that price pressures are far more entrenched than previously thought.

“The obvious surprise was the rise in the core rate, which serves to underline this theme of price stickiness,” said Ross Walker, UK economist at RBS. “Clearly it’s not falling as much as we’d hoped and it’s not making the BoE’s job any easier.”

During the second quarter, headline consumer price inflation averaged 3.5 percent, above the 3.3 percent predicted by the central bank in its May Inflation Report.


Gilts fell and sterling rose as investors sensed more Bank policymakers may be persuaded to join rate-rise advocate Sentance if underlying inflation does not resume a downward path.

“I favour a gradual rise in the Bank Rate which would be aimed to avoid destabilising confidence through a sudden lurch in policy,” Sentance said in a speech in Reading.

Consumer price inflation hit a 17-month high of 3.7 percent in April, prompting concern that slack in the economy was failing to bear down on inflation to the degree expected.

Bank Governor Mervyn King remains convinced inflation will ease back towards its 2 percent target over the course of the year once past rises in oil prices and January’s VAT rise fall out of the annual comparison, but recent Bank policy meetings have seen heated debates.

A breakdown of the figures showed weaker transport costs, notably a reduction in petrol prices, knocked 0.17 percentage points off the annual rate of CPI. A record June monthly fall in clothing prices also helped reduce annual CPI by 0.05 percentage points.

However, insurance premiums and airfares rose.

The retail price inflation gauge fell to 5.0 percent from 5.1 percent, a smaller drop than the fall to 4.9 percent analysts had expected.

The ONS blamed the stickiness of the RPI measure on the greater weight of insurance and housing costs in the index.

Editing by Susan Fenton

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