U.K. Inflation Expectations Rise After Prices Accelerate

U.K. bond-market inflation expectations climbed to the highest in more than a month after a report showed the pace of consumer-price increases in Britain unexpectedly accelerated last month.

The pound touched the lowest level against the euro since Aug. 9 as a report showed U.K. house prices fell in July to the least in a year, underscoring the weakness of the nation’s economy. The Bank of England, which kept its bond-buying program unchanged this month, is due to publish the minutes from the meeting when the decision was made tomorrow.

“The inflation data today is the primary catalyst for the move” in the so-called break-even rate, said Jamie Searle, a fixed-income strategist at Citigroup Inc. in London. “There was an upside surprise and so that market is repricing its near-term inflation profile. There’s still room for the rate to widen further.”

The yield difference between five-year U.K. nominal bonds and index-linked securities of the same maturity, a market gauge of inflation expectations known as the break-even rate, widened three basis points to 2.11 percentage points at 5:20 p.m. London time, the widest since July 5.

Consumer prices increased 2.6 percent from a year earlier, compared with 2.4 percent in June, the Office for National Statistics said today in London. Economists forecast a reading of 2.3 percent, according to the median estimate in a Bloomberg News survey. Inflation from transport rose, with airfares surging 22 percent in the month, the data showed.

Rail fares will jump as much as 6.2 percent in January, based on today’s inflation data, lobby group Passenger Focus said.

Home Prices

The pound was little changed at 78.61 pence per euro, after reaching 78.85 pence. The U.K. currency was at $1.5681.

A U.K. home-price gauge fell to minus 24 from minus 22 in June, the London-based Royal Institution of Chartered Surveyors said in a report today. A reading below zero means more surveyors saw price declines than gains last month. Measures of newly agreed sales tumbled to a four-year low.

“It’s clear that the U.K. economy is in a very fragile state,” said Chris Walker, a currency strategist at UBS AG in London. “We see some downside for the pound, but we are not looking for a huge selloff. The inflation data was driven by temporary factors. I don’t think there’s a particularly high hurdle for more stimulus.”

Britain’s currency has declined 3.2 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar slipped 0.4 percent in the period and the yen rose 1.1 percent.

‘More Action’

Policy makers started a program this month to boost the flow of credit as they seek to revive growth. The economy shrank 0.7 percent in the three months through June, the third consecutive quarter of contraction.

“I shouldn’t imagine that these numbers will overly concern the central bank,” said Michael Derks, chief strategist at FxPro Group Ltd. in London, said about the inflation data. Policy makers “are poised to undertake more action if it’s needed,” he said.

The minutes of this month’s Bank of England meeting will show how officials voted when they kept their bond-purchase target on hold at 375 billion pounds. The central bank increased the target by 50 billion pounds in July in a program that’s due to run until early November.

U.K. government bonds declined after data showed retail sales in the U.S. rose more than forecast in July, sapping demand for the safest assets. Sales advanced 0.8 percent, Commerce Department figures showed today in Washington. Economists projected a 0.3 percent increase, according to a Bloomberg survey.

The yield on the 10-year gilt climbed four basis points, or 0.04 percentage point, to 1.60 percent.

U.K. bonds returned 3.7 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds earned 3.4 percent and U.S. Treasuries rose 2 percent.

To contact the reporter on this story: Emma Charlton in London at echarlton1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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