U.K. Inflation Slows on Furniture, Clothing, Energy Prices

U.K. inflation slowed in August as prices for furniture and clothes rose less than a year earlier and increases in gas and electricity weren’t repeated.

Consumer prices rose 2.5 percent in August from the same month in 2011, compared with 2.6 percent in July, the Office for National Statistics said today in London. That matched the median forecast of 32 economists in a Bloomberg News survey. From the previous month, prices advanced 0.5 percent.

While the Bank of England has forecast that inflation will continue to ease toward its 2 percent target, upward pressures have emerged as oil costs increase and a drought in the U.S. pushes up food-commodity prices. That may open divisions among policy makers over whether they should expand their stimulus program again.

“The rise in oil prices and food commodities presents some risks for headline inflation in coming months, but with the weak economy implying only limited corporate pricing power, we still expect inflation to fall back to 2 percent by the end of the year,” James Knightley, an economist at ING Bank NV, said in a research note. “The Bank of England will have room to implement more quantitative easing.”

The pound traded at $1.6240 against the dollar as of 10:03 a.m. in London, little changed from yesterday.

Energy Bills

The biggest downward impact on the annual inflation rate in August was from furniture and household equipment, as well as clothes, and housing and household services. Within household services, domestic gas and electricity bills were unchanged in August, while they rose 1.7 percent and 1 percent respectively in the same month a year earlier.

The biggest upward effect on inflation was from transport costs, with gasoline rising 3.5 pence a liter from July. That compares with a 0.9 percent monthly increase a year ago.

Core annual inflation, which excludes alcohol, food, tobacco and energy prices, slowed to 2.1 percent in August from 2.3 percent in July, the statistics office said. Retail-price inflation, a measure used in wage negotiations, slowed to 2.9 percent from 3.2 percent, as did the RPI measure excluding mortgage-interest payments.

In a separate report today, the statistics office said U.K. house prices rose 2 percent in July from a year earlier.

‘Extremely Challenging’

While U.K. inflation is cooling, it continues to outpace wage growth, undermining consumer spending. Data last week showed that annual wage growth in July was 1.5 percent. Michael Sharp, Chief Executive Officer of Debenhams Plc (DEB), the U.K.’s second-largest department-store chain, said today the company is operating in “extremely challenging market conditions.”

The Bank of England will tomorrow release the minutes of this month’s policy meeting, showing how officials voted when they kept their bond-purchase target on hold at 375 billion pounds ($609 billion). Policy makers Spencer Dale and Ben Broadbent last week highlighted inflation risks, with Dale cautioning against “Pavlovian” calls for more stimulus. In contrast, their colleague David Miles said loose policy is needed and it’s “right that it is still being moved further in that direction.”

The central bank increased the bond-purchase target by 50 billion pounds in July in a program that’s due to run until early November.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editor responsible for this story: Matthew Brockett at mbrockett1@bloomberg.net

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