March 25, 2014 / 9:38 AM / 6 years ago

UK inflation hits new four-year low, wages still lag

LONDON (Reuters) - British inflation fell to its lowest in more than four years in February, easing pressure on Britons’ living standards ahead of next year’s election and dipping further below the Bank of England’s 2 percent target.

Primulas bloom outside the Bank of England in the City of London March 21, 2014. REUTERS/Luke MacGregor

Prices have been rising faster than pay almost continually since the start of the financial crisis in early 2008, and the fall in living standards despite recent strong economic growth is a major line of attack by the opposition Labour Party.

But after February’s fall in consumer price inflation to 1.7 percent, its lowest since October 2009, and a recent small pick-up in wage growth, the gap between the two is at its narrowest since April 2010, the Office for National Statistics said.

February’s drop in inflation was in line with economists’ expectations and largely driven by the biggest drop in fuel prices since September 2009, as well as smaller increases in clothing prices and household electricity and heating bills.

It follows a sharp fall over the past six months in inflation, which dipped below the BoE’s 2 percent target in January for the first time in more than four years.

Easing price pressures have underpinned the view the central bank can keep monetary policy loose for a while without the risk of triggering inflation even as the economy recovers quickly.

However, the Bank is also keenly aware of rising house prices which separate official data on Tuesday showed were increasing at their fastest pace in more than three years.

“Without the fall in inflation, there would undoubtedly be a rising clamour for policymakers to tighten policy to ward off fears of overheating, especially given the recent housing market upturn,” Chris Williamson, chief economist at Markit said.

“Key to how long the Bank of England can keep rates low therefore will be earnings growth.”


Despite the fall in overall inflation, house prices - which are not counted in the CPI measure - saw their biggest annual increase in January since August 2010.

BoE Governor Mark Carney has said the Bank is very alert to risks in the housing market, and in last week’s annual budget, Chancellor George Osborne urged the central bank to keep an especially close eye on house prices.

House prices across Britain rose by 6.8 percent in the 12 months to January, up from 5.5 percent in December, the ONS also said on Tuesday. London prices soared by 13.2 percent, the biggest annual rise since July 2010.

Figures from Britain’s main banks, also released on Tuesday, pointed to a slight levelling off in the number of mortgages being approved to buy new homes, which hit the highest since September 2007 in January.

But the amount of net new mortgage lending rose by the largest amount since March 2012, and economists said they expected house prices to continue rising.

“The slight decline in mortgage approvals for house purchase in February is almost certainly a blip, and doesn’t herald the end of the revival in mortgage lending,” consultancy Capital Economics wrote in a note to clients.

Concerns about the rapid rebound in house prices prompted the BoE to announce in November that it would scrap the part of its Funding for Lending Scheme that supports mortgage lending, although it has stopped short of saying their is a bubble.

Slideshow (4 Images)

A shortage of housing is a major issue, and Osborne said last week that the government would extend the equity loan portion of the government’s Help to Buy house purchase programme for four years longer than planned to 2020.

The government says the scheme promotes construction, though critics say that the main effect - particularly of a second element that guarantees high loan-to-value mortgages - is to push up house prices.

Britain’s economic rebound has been led by consumer spending and the housing market. Data from the Confederation of British Industry, also released on Tuesday, showed a slowdown in retail sales growth in March, but that stores expected a big rebound in April. Some of the effect was due to differences in the timing of Easter and Mother’s Day, the CBI added.

Additional reporting by Andy Bruce and William Schomberg; Editing by Catherine Evans

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