October 14, 2014 / 8:35 AM / 6 years ago

Inflation slides in September, market sees delayed rate hike

LONDON (Reuters) - British inflation slowed sharply in September to its lowest level in five years, further reducing pressure on the Bank of England to start raising interest rates even as the economy grows strongly.

Customers shop for groceries in a supermarket in London October 18, 2011. REUTERS/Neil Hall

Consumer prices rose by a weaker-than-expected 1.2 percent on the year in September, down from 1.5 percent in August, the Office for National Statistics said on Tuesday.

The ONS said food and motor fuel prices fell, helped by a supermarket price war, weaker global oil prices and a rise in sterling, which makes imports cheaper.

Core inflation, which excludes much of the effect of volatile food and energy costs, also slowed, hitting its lowest level since April 2009.

Economists taking part in a Reuters poll had expected the headline consumer price index to fall to 1.4 percent.

Sterling weakened, yields on 10-year British government bonds fell to their lowest level since June last year, and investors added to bets that the British central bank might start to raise interest rates only in mid-2015.

“The lower reading on core inflation, if it were to be sustained, raises the risk that the BoE delays its first rate hike beyond February,” said Dominic Bryant, an economist with BNP Paribas.

Stripping out increases in energy, food, alcohol and tobacco prices, inflation rose by a yearly 1.5 percent last month, slowing significantly from 1.9 percent a month earlier.

Headline consumer prices did not rise between August and September, the ONS said, and its figures also showed falling prices at the factory gate, indicating no pressure on inflation in the pipeline.


BoE Governor Mark Carney said last month that the central bank might start to raise interest rates next spring if the labour market continues to recover from the financial crisis.

But since then, signs have grown that the euro zone is at risk of falling into a new recession, hurting demand in Britain’s manufacturing sector in particular.

And wage growth remains depressed in Britain, meaning little pressure on prices. ONS data on Wednesday is expected to show that average weekly earnings rose just 0.7 percent in the three months to August compared with same period last year.

Separate data from the ONS on Tuesday showed house prices in Britain rose 11.7 percent in yearly terms in August, unchanged from the increase in July.

Other, more up-to-date surveys have shown the rapid pace of house price growth starting to cool.

In London, property prices picked up speed in August, rising 19.6 percent compared with a year ago, up from 19.1 percent in July, the ONS said.

Until December last year, annual consumer price inflation had exceeded the BoE’s 2 percent target every month since December 2009, eroding the spending power of households and making falling living standards a big political issue ahead of next year’s national election.

The ONS said the biggest negative contributions to inflation in September were from transport, recreation and culture and restaurants and hotels.

Food prices fell 1.5 percent compared with September last year as big supermarket chains competed to win customers. Fuel prices fell by 6 percent.

The BoE has said it expects inflation to hit its target of 2 percent only in around three years’ time and some economists have said it could dip close to 1 percent soon.

Carney said in a television interview broadcast on Monday that the BoE would take into account how weaker global demand was producing a “very benign global inflationary environment”.

After his predecessor Mervyn King had to explain formally why inflation was persistently above 2 percent, Carney risks having to write to Chancellor George Osborne to explain a fall in inflation to under 1 percent if the trend in consumer prices continues.

The ONS said on Tuesday that factory gate prices fell by 0.4 percent in annual terms, the biggest yearly fall since September 2009. Economists had expected a 0.3 percent decline.

Writing by William Schomberg; Editing by Catherine Evans

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