LONDON (Reuters) - British inflation fell much less than expected in May to remain above the Bank of England’s 2.0 percent target for the 20th month, boosting speculation the Bank of England would not extend its quantitative easing programme.
The Office for National Statistics said consumer prices rose 0.6 percent last month, taking the annual rate to 2.2 percent from 2.3 percent in April. That was the lowest since January 2008 but above forecasts of 2.0 percent.
Sterling rose to hit its highest level against the euro this year and gilt futures fell after figures as traders bet that at the margin they made more stimulus from the Bank of England less likely.
“Here we are amid the worst recession in three decades and yet CPI is stubbornly above target,” said Ross Walker, UK economist at RBS. “It does question how much real deflation risk there is out there. There can’t be much more quantitative easing to come if we keep getting outturns like this.”
Policymakers still expect inflation to fall sharply over the coming months and have already embarked on a 125 billion pound QE programme to try to pull the British economy out of recession.
David Blanchflower, who left at the MPC at the end of May, told Reuters in an interview last week that he expected the CPI rate to fall to zero by the end of the year.
Inflation in the euro zone fell to zero in May, official figures showed on Tuesday.
But for now, price pressures in Britain remain sticky, perhaps because of the weakness of the pound and maybe because demand is holding up more than people had expected.
Besides an anticipated upward effect from tax rises for alcohol and tobacco in this year’s government budget, the chief upward influences were from rising prices of DVDs, televisions, clothing and footwear.
The chief downward influence came from food prices which had been a stubborn source of upward pressure for many months and from falling utility bills after the huge jumps of last year.
“We still think inflation will fall below one percent later this year but the combination of green shoots in the economy and inflation surprising on the upside does make the case for more quantitative easing harder to argue,” said Alan Clarke, an economist at BNP Paribas.
The government has set a 150 billion pound initial ceiling for the quantitative easing programme and many analysts expect the BoE to use all of that.
The annual RPI measure of inflation, on which many wage deals are based and which includes housing costs, unexpectedly rose to -1.1 percent in May from -1.2 percent in April. Analysts had predicted a drop to -1.5 percent.
As well as being affected by the same upward pressures as the CPI measure, May’s RPI was also boosted by housing costs as average mortgage interest rate payments rose slightly.
Editing by Stephen Nisbet