September 17, 2013 / 8:57 AM / 6 years ago

Slower inflation eases pressure over rates pledge

LONDON (Reuters) - Inflation slowed in August and there were signs it could ease further, welcome news for the Bank of England which is planning to keep interest rates at a record low to steer the economy back to health.

Consumer price inflation stood at an annual 2.7 percent versus 2.8 percent in July, the Office for National Statistics said on Tuesday, its second consecutive fall and in line with forecasts by economists.

A slower increase in petrol prices than a year earlier and discounting by retailers helped bring down the yearly rate.

Sterling fell against the dollar and the euro while British government bond prices briefly pared some earlier losses as the data put no new pressure on the BoE over its rate pledge.

Some economists said inflation could undershoot the Bank’s forecasts made as recently as last month - a change for the British central bank, which has consistently underestimated inflation pressures in recent years.

“Absent a shock in petrol or utility prices, inflation may come down quicker than the MPC (Monetary Policy Committee) thinks,” said Jens Larsen, an economist with RBC in London.

Retail price inflation, seen by many as a broader gauge of the cost of living, rose slightly more than expected, however, to 3.3 percent from 3.1 percent in July.

Separate data from the ONS showed house prices rose 3.3 percent across the country in the year to July. Gains were driven by London and the South East, pushing the index for England alone to a record high.

Britain’s Treasury is working on an extension of its Help To Buy programme which seeks to help home-buyers get mortgages. Some critics of the scheme say it risks causing a new housing bubble and its next phase should be scrapped.

In monthly terms, the CPI rose 0.4 percent, slightly slower than a forecast of 0.5 percent in a Reuters poll and the lowest monthly increase for August since 2009.

In a sign that price pressures were likely to remain subdued in coming months, factory gate inflation eased to 1.6 percent from a six-month high in July of 2.1 percent. Firms’ input costs unexpectedly fell on the month.

NO PRICE PRESSURE ON BOE

The BoE last month pledged to keep interest rates at 0.5 percent until unemployment falls to 7 percent - something it expects only in late 2016 - as long as inflation expectations remain under control.

Governor Mark Carney last week reiterated that inflation would probably decline over the next two years in what would be a relief for households, which have seen their wages rise much more slowly than prices.

The Bank targets consumer price inflation of 2 percent, which was the level of core inflation in August. It has refrained from taking action to bring the CPI down to 2 percent for fear of damaging the economy and because it believes several factors pushing up inflation are temporary.

One top policymaker at the BoE, Martin Weale, voted against the BoE’s new guidance plan last month, saying it could push up inflation because it does not set a sufficiently short time horizon for judging the risk of price growth expectations.

In June, Britain’s consumer prices rose at their fastest rate in over a year of 2.9 percent.

Helping slow the pace of price rises in August were a more moderate increase in airfares than a year earlier as well as the 2 pence per litre increase in petrol prices, less than the 3.5 pence increase in the same month of 2012.

One of the biggest upward pressures on inflation came from household equipment, including electric fans which were in demand during August as Britain enjoyed a rare hot summer.

Additional reporting by David Milliken; Editing by Catherine Evans

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