June 12, 2007 / 8:33 AM / in 13 years

Inflation weakest in seven months

LONDON (Reuters) - The inflation rate slowed more than expected to its weakest rate in seven months in May as the cost of utility bills and food came down, but expectations for a fifth rate hike in a year remained intact.

Inflation rate slowed more than expected to its weakest rate in seven months in May as the cost of utility bills and food came down, official figures showed on Tuesday. Reuters/File

The Office for National Statistics said on Tuesday consumer prices rose 0.3 percent last month, taking the annual rate down to 2.5 percent — the lowest since October but firmly above the 2 percent target — from 2.8 in April.

Sterling fell and stocks and government bonds rose as analysts had predicted a 2.6 percent reading, but economists said the Bank of England may still have to hike interest rates to at least 5.75 percent this year to control price pressures.

“With CPI still well above target there is likely to be little let up in the pace of monetary tightening just yet,” said James Knightley, an economist at ING.

“Indeed, comments from BoE Governor Meryvn King overnight suggest that in a firm growth environment, the Monetary Policy Committee will need to see inflationary pressures fall significantly to prevent further rate rises.”

King warned in a speech in Wales late on Monday the central bank may have to hike borrowing costs for a fifth time since August if data continued to show the economy straining against the buffers and firms eager to push up prices.

FOOD, UTILITY BILLS FALL

Consumer price growth has eased considerably from the decade high of 3.1 percent hit in March — a rate that forced King to write an explanatory letter to government — and most economists expect inflation to fall back towards target this year.

But, alarmingly for policymakers, survey evidence has shown industry more than ready to ramp up prices to repair profit margins damaged in last year’s spike in energy costs.

Earlier this month, the Chartered Institute for Purchasing and Supply said factory gate inflation picked up in May to equal a record high. Another survey showed manufacturers intending to raise prices at the fastest rate in 12 years.

Official data shows steady factory gate price growth but the cost of raw materials soaring, which could feed through to high street prices in the coming months.

The ONS said the biggest downward impact on consumer price inflation in May came from utility bills as electricity and gas providers have cut prices after steep rises a year ago.

Overall, housing and household services sliced 0.23 percentage points off the headline rate. There was a further downward impact from falling vegetable and meat prices.

The main upward pressure came from transport following large increases in the cost of air travel. Last year, fares fell in May having risen sharply the month before as the price collection period coincided with Easter in April 2006.

Retail price inflation, on which most pay deals are based, eased in line with expectations to an annual rate of 4.3 percent in May, the weakest since January.

Runaway wage growth has failed to materialise this year despite higher living costs and fears to the contrary, although policymakers say they are still on the look out for any spike in pay demands.

“The Bank should still remain worried about longer term upside inflation risks,” said David Brown, an economist at Bear Stearns. “It has not conquered these yet.”

In separate data, Britain’s goods trade gap with the rest of the world narrowed to its smallest since October 2005 in April, slimming to 6.316 billion pounds from 7.157 billion in March.

Analysts had predicted a deficit of 7 billion pounds.

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