November 17, 2015 / 9:42 AM / 5 years ago

UK consumer prices dip again in October, but look set to head higher

LONDON (Reuters) - Britain marked two consecutive months of falling consumer prices for the first time on record in October, but economists said the bout of mild deflation is likely to end in the next few months.

A woman stops to look in the window of a shop in London March 25, 2014. REUTERS/Luke MacGregor

Tuesday’s figures are unlikely to sway Bank of England policymakers as the consider when to raise interest rates from their record lows, but there was a slight uptick in core inflation that pushed sterling higher against the dollar.

The Office for National Statistics said consumer prices edged down 0.1 percent on the year, in line with expectations in a Reuters poll of economists and matching September’s decline.

Headline British inflation has been stuck in a narrow range of -0.1 to +0.1 percent since February, giving consumers more spending power just as their earnings have begun to grow more strongly, boding well for economic growth.

A plunge in oil prices during late 2014 drops out of the annual comparison over the next few months, so a nine-month stretch of near-zero inflation looks about to end, perhaps as soon as November, economists said.

“Nevertheless, low inflation will probably continue through next year. The strong pound and weak external costs are likely to continue to bear down on prices of items with a high import content,” Citi economist Michael Saunders said.

Unlike policymakers in the euro zone, the BoE is relatively unconcerned that lack of inflation will turn into persistent deflation, with consumer demand strong and domestic wages rising.

Core consumer price inflation - which strips out changes in the price of energy, food, alcohol and tobacco - rose to 1.1 percent compared with economists’ expectations for it to hold at 1.0 percent.

Education, food and alcohol exerted most of the downward pressure on consumer prices in October, offsetting rising clothing prices.

Earlier this month, the BoE predicted that inflation would not rise above 1 percent until the second half of next year, and only reach its 2 percent target in two years, based on a market projection of no increases in interest rates until early 2017.

The central bank has said that around four-fifths of the shortfall in inflation from its 2 percent target is due to short-run factors such as lower oil prices and a strengthening in sterling.

But cost pressures in the labour market are also running below the level needed for inflation to return to target, the BoE says, disputing recent ONS figures which showed unit labour costs rising at their fastest rate in two-and-a-half years.

(Fixes subject-verb agreement in headline.)

Editing by Larry King

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