U.K. Inflation Unexpectedly Slows; Clothing Drops

U.K. inflation unexpectedly fell to its lowest rate in 2 1/2 years in June as clothing prices plunged, helping to vindicate the central bank’s increase in emergency stimulus.

Consumer prices rose 2.4 percent from a year earlier, the least since November 2009 and down from a 2.8 percent gain in May, the Office for National Statistics said today in London. No change in the rate was forecast, according to the median estimate in a Bloomberg News survey. From May, prices fell 0.4 percent, the biggest June decline since records began in 1996.

The Bank of England added 50 billion pounds ($78 billion) to its asset-purchase program this month as falling inflation gave policy makers scope to spur an economy struggling to emerge from its second recession since 2009. The inflation figures offer some respite for consumers who have seen their wages eroded by soaring energy prices.

“The recent rise in oil and food commodity prices indicates that the pace of declines will slow, but the weak corporate pricing power environment still suggests we should be expecting sub-2 percent inflation readings well before the end of the year,” said James Knightley, senior economist at ING Groep NV in London. “This gives the Bank of England plenty of room to respond aggressively to the downturn in activity and we suggest that the BoE’s Asset Purchase Facility will be expanded to 450 billion pounds by the end of 2012.”

Pound Falls

The pound extended its decline against the dollar immediately after the data before rebounding. It traded at $1.5646 as of 10:50 a.m. in London, little changed from yesterday. Government bonds pared their decline, leaving the yield on the 10-year gilt up 1 basis point at 1.502 percent.

Inflation eased last month as clothing and footwear prices fell 4.2 percent, the biggest June decline on record. The wettest June since records began in 1910 -- and the coolest since 1991 -- forced retailers to discount prices, the statistics office said.

There were also downward pressures on inflation from cheaper diesel, gasoline and air fares, as well as food and non- alcoholic drinks, particularly meat prices.

Core inflation, which excludes alcohol, food, tobacco and energy prices, slowed to 2.1 percent from 2.2 percent in May.

Retail-price inflation, a measure used in wage negotiations, moderated to 2.8 percent from 3.1 percent. Inflation based on retail prices excluding mortgage-interest payments also cooled to 2.8 percent from 3.1 percent.

BOE Stimulus

Bank of England policy makers increased their bond-purchase target to 375 billion pounds this month as data suggests the recession continued in the second quarter.

The central bank said on July 5 that it expects inflation will continue to ease and that without more stimulus, it was “more likely than not” to undershoot its 2 percent target in the medium term. In addition, the bank’s new funding for lending plan could boost credit to companies and households by at least 80 billion pounds.

Consumer-price inflation fell below the 3 percent upper limit for the first time since 2009 in May, helped by drop in oil prices and food costs. The rate has fallen for three months in a row and is down from a peak of 5.2 percent in September last year.

The decline underlines the weakness of an economy being hit by government spending cuts, Europe’s debt crisis and the squeeze on household incomes. The International Monetary Fund yesterday cut its growth forecasts and said the U.K. will barely expand this year.

“Inflation has more than halved since September, meaning a little less pressure on family budgets,” economic secretary to the Treasury, Chloe Smith, said in an e-mailed statement. “This lower inflation should support high-street spending and growth in the economy in the months to come.”

In a separate report today, the ONS said U.K. house prices were unchanged in May from April, while the annual increase was 2.3 percent, the most since December 2010.

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

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

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