U.K. Inflation Slows to 2.7% on Transport, Clothing Prices

Photographer: Simon Dawson/Bloomberg

BOE policy makers introduced forward guidance last month, pledging to keep interest rates low until unemployment falls to 7 percent as long as inflation expectations don’t get dislodged. Close

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Photographer: Simon Dawson/Bloomberg

BOE policy makers introduced forward guidance last month, pledging to keep interest rates low until unemployment falls to 7 percent as long as inflation expectations don’t get dislodged.

U.K. inflation slowed in August as transport costs and prices for new autumn clothing ranges rose less than a year earlier.

Consumer prices increased 2.7 percent from a year earlier, the least in three months, compared with 2.8 percent in July, the Office for National Statistics said in London today. That matched the median forecast of 34 economists in a Bloomberg News survey. Core inflation, which excludes volatile food and energy costs, remained at 2 percent.

BOE policy makers introduced forward guidance last month, pledging to keep interest rates low until unemployment falls to 7 percent as long as inflation expectations don’t get dislodged. Governor Mark Carney told lawmakers last week price gains will slow to the bank’s 2 percent goal in a little over two years, and that the policy objective is about “getting back in a responsible manner” to the target.

“As long as inflation figures stay roughly where they are the Bank of England won’t be too overly concerned,” said Stuart Green, an economist at Banco Santander SA in London. “It would take some shock data over the next few months for them to really take note.”

The largest downward contribution to the annual inflation rate in August came from motor fuels and air transport, as well as clothing. The statistics office said the main downward effect within clothing was from women’s outerwear.

From the previous month, consumer prices rose 0.4 percent, the smallest increase for an August since 2009.

Wage Growth

The pound erased its gain against the dollar after the data were published. It traded at $1.5896 as of 10:26 a.m. London time, unchanged from yesterday.

Retail-price inflation, used in wage talks and as a basis for the inflation-linked bond market, accelerated to 3.3 percent in August from 3.1 percent in July. Excluding mortgage interest payments, inflation by that measure was also 3.3 percent.

Wage growth continues to lag behind inflation, squeezing consumers. Data last week showed that average weekly wages rose 1 percent in the quarter through July compared with a year earlier.

“The economy is turning a corner, but the recovery is in its early stages and risks remain,” the U.K. Treasury said in an e-mailed statement.

Next Plc, (NXT) the U.K.’s second-largest clothing retailer, said this month the economy “looks set to improve moderately, albeit at a slow pace and with the risk that credit easing may not translate into growth in real earnings.”

Guidance Defense

Carney told U.K. lawmakers last week that guidance is supporting the economic recovery as he responded to suggestions that it may be confusing to the public and doubted by investors. The BOE plans to keep its key interest rate at a record low of 0.5 percent until the labor market recovers, subject to two inflation clauses.

Officials would “have to take a decision” were one of these so-called “knockouts” breached, Carney said. The caveats are linked to consumer expectations for CPI and the BOE’s forecasts.

In a separate report today, the statistics office said that input prices fell 0.2 percent in August from July. The annual rate of increase slowed to 2.8 percent from 5.1 percent.

Factory-gate prices rose 0.1 percent in August from July and increased 1.6 percent from a year earlier. Core output prices were unchanged on the month.

In another report, the ONS said annual U.K. house-price inflation was 3.3 percent in July, up from 3.1 percent in June. In London, prices increased 9.7 percent. In England, based on a price index, property values are now higher than their previous peak before the financial crisis. The index was at 182.4 in July, 0.9 percent higher than January 2008.

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

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

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