June 19 (Bloomberg) -- U.K. inflation slowed to the weakest in 2 1/2 years in May, led by food and fuel prices, which may ease resistance among Bank of England policy makers to increase monetary stimulus.
Consumer prices rose a 2.8 percent from a year earlier, compared with a 3 percent increase in April, the Office for National Statistics said today in London. That’s the weakest since November 2009. Economists had forecast a gain of 3 percent, the median of 29 estimates in a Bloomberg News survey showed. From April, prices fell 0.1 percent, the first drop in that period since records began in 1996.
While inflation has held above the central bank’s 2 percent target since December 2009, price pressures are easing as oil and food costs drop and Europe’s debt turmoil continues to weigh on Britain. The Bank of England responded last week by introducing measures to stoke bank lending, and Governor Mervyn King said the case for restarting stimulus is “growing.”
“Inflation is likely to fall a lot further on energy prices, and there’s a lot of slack in the economy,” said Joost Beaumont, an economist at ABN Amro Bank NV in Amsterdam. “The central bank will increase asset purchases in July. They think the euro crisis will linger for longer and they want to be ahead of the curve.”
The pound weakened against the dollar immediately after the data were published before recovering. It traded at $1.5681 as of 12:47 p.m. in London, up 0.1 percent on the day. Sterling fell 0.3 percent against the euro. The yield on the 10-year government bond fell 2 basis points to 1.64 percent.
Food, Fuel Costs
The biggest downward pressure on the annual inflation rate came from motor fuels as well as food and non-alcoholic drinks, the statistics office said. Core inflation, which excludes alcohol, food, tobacco and energy prices, accelerated to 2.2 percent in May from 2.1 percent in April.
Retail-price inflation, a measure used in wage negotiations, eased to 3.1 percent in May from 3.5 percent in April, today’s report showed. The retail-price index excluding mortgage-interest payments also cooled to 3.1 percent.
In a separate report today, the ONS said U.K. house prices rose 1.4 percent in April from a year earlier, the biggest increase since December 2010.
Bank of England policy makers held their bond-purchase plan at 325 billion pounds ($508 billion) this month and the benchmark interest rate at a record low of 0.5 percent. The bank will publish the minutes of the decision tomorrow showing how officials voted.
King announced a “funding for lending” program last week to encourage credit growth in the U.K. and to combat a “black cloud” from the worsening sovereign debt crisis in Europe.
The central bank forecast in May that annual consumer-price gains will slow to its 2 percent goal by about the middle of next year and to about 1.6 percent in two years.
“It looks to me like they are going to undershoot their inflation forecast, giving them some room for that monetary easing King alluded to,” Tom Vosa, an economist at National Australia Bank, said in an interview on Bloomberg Television in London. “The U.K. economy at best is flatlining.”
U.K. consumer confidence “isn’t getting any better” Tesco Plc Chief Executive Officer Philip Clarke said June 11, and falling oil prices are “the great hope” for shoppers. The U.K.’s largest supermarket company said domestic sales fell for a fourth quarter.
Oil prices have fallen more than 20 percent since the start of May. Last month, global food prices had their biggest drop in more than two years, with an index of 55 food items tracked by the United Nations’ Food & Agriculture Organization dropping 4.2 percent. U.K. factory-output prices fell 2.5 percent in May as energy prices declined, the statistics office said on June 8.
“Given all the other challenges facing us, it’s a welcome respite,” Danny Alexander, chief secretary to the U.K. Treasury, said on BBC television. “Inflation is heading back towards target. Given the squeeze on real incomes, this is a welcome step in the right direction.”
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