March 23, 2010 / 9:36 AM / 10 years ago

Inflation slows more than expected

LONDON (Reuters) - British annual inflation slowed last month for the first time since September, boosting hopes that price pressures have peaked and cementing expectations that interest rate rises remain a long way off.

A child looks at toys in a shop on Oxford Street in London December 20, 2009. REUTERS/Luke MacGregor

The Office for National Statistics said consumer price inflation eased to 3.0 percent in February from January’s 14-month high of 3.5 percent. Analysts had expected a smaller drop to 3.1 percent.

The biggest downward impact came from the price of games and toys which fell last month, having rebounded last February after massive discounting in January 2009, when the recession sent many companies out of business.

The June gilt future rallied to a contract high as the figures boosted expectations that inflation would drop back to the Bank of England’s 2 percent target by the end of the year.

“These figures, coupled with low private sector wage increases, should enable the BoE to maintain an expansionary policy approach without worrying that inflation will accelerate in the near future,” said David Kern, chief economist at the British Chambers of Commerce.

Britain’s central bank has long insisted that the spike in inflation at the turn of the year would be short-lived.

It considers the jump in inflation, which stood at just 1.1 percent in September, to be the result of base effects relating to 2008’s sharp oil price falls and a temporary cut in value-added tax dropping out of the year-on-year calculation.

ECONOMIC HEADWINDS

Britain’s economy pulled out of recession at the end of last year after an 18-month recession that wiped out more than six percent of output.

Surveys suggest the recovery remains fragile and analysts reckon spare capacity in the economy will bear down on prices over the course of the year.

Figures from the Confederation of British Industry on Tuesday showed retail sales growth slowed more than expected in March.

“With a weak economy and pay freezes for many, consumers are likely to remain cautious for some time,” said Andy Clarke, chief operating officer of Asda and chairman of the CBI’s survey panel.”

Separate figures from the British Bankers’ Association showed mortgage approvals remained subdued in February following a rush to complete house purchases before stamp duty bands were changed at the end of last year.

Core inflation, which strips out volatile items such as energy and food prices, eased to 2.9 percent from 3.1 percent in January.

The broader retail price inflation gauge, held steady at 3.7 percent, in line with forecasts.

With banks, households and the government all looking to repair stretched balances sheets, analysts said price pressures should continue to subside over the coming months.

“Frankly interest rates are not going to be an issue for at least another six months, and it’s a fifty-fifty call whether the BoE does anything before the end of this year,” said Peter Dixon, economist at Commerzbank.

The bank cut its key interest rate to a record low of 0.5 percent in March 2009, and has kept it unchanged since then to fight a deep recession.

Editing by Toby Chopra

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