September 14, 2010 / 8:38 AM / 9 years ago

Inflation resilient but housing market weakens

LONDON (Reuters) - British inflation defied expectations for a fall in August but property prices weakened further and the Bank of England’s newest recruit signalled he was in no rush to raise interest rates.

Fruit is displayed in the window of a cafe, in London July 14, 2009. REUTERS/Luke MacGregor

Consumer price inflation held steady at 3.1 percent last month, more than a percentage point above target, after big rises in airfares and clothing prices offset easing fuel costs.

Analysts had predicted a drop to 2.9 percent but inflation has repeatedly surprised on the upside, a dilemma for Bank policymakers who are still worried about growth as the economy recovers from the worst recession since World War Two.

“With inflation having been sticky over the recent past, questions will be asked whether this has been due to less spare capacity than commonly assumed,” said George Buckley, UK economist at Deutsche Bank.

Martin Weale, the newest member of the central bank’s monetary policy committee, said he had been surprised by the strength of inflation. But he said he was “comfortable” with forecasts published by the central bank in August which showed inflation falling back to target in the medium term.

“The evidence I’ve seen doesn’t suggest that inflation expectations have been de-anchored,” Weale told a cross-party parliamentary committee. “We certainly aren’t seeing pay increases taking off at the moment.”


Consumer price inflation has been above 2 percent since December 2009, which the Bank has largely blamed on one-off factors such as sterling weakness and a rise in value-added tax at the start of the 2010.

One Bank policymaker has been calling for interest rates to rise from their record low of 0.5 percent to counter inflation but the central bank is, for now, leaving the door open to expanding its 200 billion pound asset-buying programme to boost the economy.

The economy grew by 1.2 percent in the second quarter but most analysts are worried that planned fiscal tightening could hit growth hard next year.

House prices are falling again despite record low interest rates. A survey by the Royal Institution of Chartered Surveyors showed them dropping at their fastest rate since May 2009.

RICS’s headline house price index dropped to -32 from -8, the sharpest one-month fall since June 2004, and newly-agreed sales suffered their biggest fall in two years.

Another survey by the Nationwide building society showed consumer morale rose in August after three months of decline, but the index remained well below the historical average.


The core rate of inflation — which excludes volatile food and energy costs — rose to 2.8 percent from July’s 2.6 percent.

On the month, CPI inflation jumped by 0.5 percent, compared to a 0.2 percent fall in July and forecasts for a 0.3 percent increase.

The largest upward effect came from air transport, with fares rising at their fastest pace for a month of August on record. Clothing and footwear prices saw their sharpest August rise since 2001, with a big impact from the cost of women’s outerwear at the start of the autumn season.

Seasonal discounting occurred earlier in 2010 than in previous years, adding to the upward pressure in August, and global cotton prices have risen sharply due to flooding in China and Pakistan.

Food prices rose at their fastest annual pace since July 2009, with strong monthly rises in the cost of bread, cereals and vegetables.

Producer price data earlier this month showed sharp increases in the cost of wheat due to drought in Russia pushing up global commodity prices.

“Overall inflation is stubbornly high and the impact of higher wheat prices has yet to exert itself fully on CPI figures,” said Investec’s Shaw.

Editing by Ron Askew

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