U.K. Inflation Stays Above BOE Limit on Alcohol, Food: Economy

U.K. inflation slowed less than economists forecast in February as higher alcohol and food costs helped keep consumer-price gains above the Bank of England’s upper limit.

Consumer prices rose 3.4 percent from a year earlier, the least since November 2010, compared with 3.6 percent in January, the Office for National Statistics said today in London. The median estimate of 36 economists was for a reading of 3.3 percent last month, according to a Bloomberg News survey.

The pace of the slowdown in inflation may be curbed by rising oil costs, which have surged in the past six months. While the Bank of England has forecast that price growth will ease to its 2 percent goal this year, policy maker Martin Weale said last month there is a “risk that there may be more persistence to inflation.”

One can “expect further declines in inflation to be more modest going forward,” George Buckley, chief U.K. economist at Deutsche Bank AG (DBK), said in an e-mailed note. “The key question remains where consumer price inflation settles. We think it will be higher than Bank of England forecasts at year-end.”

The pound pared its decline against the dollar after the data were released. It traded at $1.5866 as of 10:56 a.m. in London, down 0.2 percent from yesterday. Gilts fell, leaving the yield on the 10-year bond little changed at 2.42 percent.

Photographer: Simon Dawson/Bloomberg

Customers browse at a Marks & Spencer's store in London. Close

Customers browse at a Marks & Spencer's store in London.

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Photographer: Simon Dawson/Bloomberg

Customers browse at a Marks & Spencer's store in London.

Hard Liquor

The largest downward effect on the 12-month inflation rate in February was from housing and household services, the statistics office said. The largest upward effect came from tobacco and alcohol.

Prices for spirits rose 2.6 percent in February from January, compared with a decline of 5.8 percent in the same month in 2011. The ONS said retailers' discounting of alcohol in different months creates volatility in the price changes for these products. Vegetable prices rose 3.3 percent on the month, while soft drinks increased 4.3 percent.

From the previous month, consumer prices rose 0.6 percent in February, exceeding the median forecast of a 0.4 percent gain in a Bloomberg News survey of 31 economists.

Core annual inflation, which excludes alcohol, food, tobacco and energy prices, slowed to 2.4 percent in February, the least since November 2009, from 2.6 percent in January.

Consumer Squeeze

Retail-price inflation, a measure used in wage negotiations, slowed to 3.7 percent in February from 3.9 percent, the lowest rate since February 2010. The retail-price index excluding mortgage-interest payments rose an annual 3.8 percent, down from 4 percent.

While inflation is cooling, it’s still outpacing wage growth, squeezing consumers. Total pay growth slowed to 1.4 percent in the three months through January from 1.9 percent in the fourth quarter of 2011, data last week showed. Chancellor of the Exchequer George Osborne has said his annual budget tomorrow will include changes “for lifting low-income people out of tax.”

The economy shrank 0.2 percent in the fourth quarter, its first contraction in a year, while unemployment is at the highest in 16 years. Premier Foods Plc (<PFD>), the maker of Hovis bread, said yesterday the consumer environment “will remain challenging with continued high levels of promotional activity and ongoing cost inflation.”

Oil Prices

Crude-oil prices have increased about 25 percent in the past six months on concern that tension in the Middle East could disrupt supplies. U.K. producer prices rose 0.6 percent in February from the previous month, the most since April. The annual rate of factory inflation accelerated to 4.1 percent from 4 percent.

German producer prices rose 0.4 percent from January, when they gained 0.6 percent, the Federal Statistics Office said today. The median estimate in a Bloomberg News survey of analysts was for an increase of 0.5 percent. From a year earlier, prices rose 3.2 percent.

Bank of England Governor Mervyn King forecasts that inflation will slow this year, partly as the government’s sales- tax increase in January 2011 drops out of the annual comparison. In February, the central bank forecast that consumer-price gains would slow to below their 2 percent goal this year after a peak of 5.2 percent in September.

The central bank’s 50 billion-pound ($79 billion) round of bond purchases announced on Feb. 9 will be completed in early May, when the bank will release the results of its subsequent forecasting round.

Thailand, Australia

Central banks in Thailand and Taiwan may keep interest rates unchanged this week, joining Australia and most Asia- Pacific economies in holding fire to gauge the extent of China’s slowdown, inflation risks and the European crisis.

Thailand will maintain its benchmark rate at 3 percent tomorrow after two previous cuts, according to 19 of 21 economists surveyed by Bloomberg News, while all 10 economists in a separate survey said Taiwan may leave its key borrowing cost at 1.875 percent on March 22. Australia kept its rate unchanged on March 6 as a mining investment boom intensified and risks from Europe eased, minutes released today showed.

Separately, the U.S. Commerce Department may say builders broke ground on 700,000 homes in February at an annual pace, the most in three months, economists predict. Building permits, a proxy for future construction, probably climbed 0.6 percent last month from January, a separate survey showed.

To contact the reporters on this story: Scott Hamilton in London at shamilton8@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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