June 17 (Bloomberg) -- Britain’s inflation rate fell to the lowest in 4 1/2 years in May as food and transport costs declined, providing Bank of England policy makers breathing space over interest rates.
Consumer prices rose 1.5 percent in May, the least since October 2009 and down from a rate of 1.8 percent in April, the Office for National Statistics said in London today. That compares with a median forecast of 1.7 percent in a Bloomberg News survey. Inflation has been at or below the BOE’s 2 percent target for six months, the longest stretch since 2009.
The figures buy time for Governor Mark Carney as a strengthening economy adds pressure on the Monetary Policy Committee to end five years of emergency stimulus. Investors, who were pricing in a January rate increase after Carney said last week that officials might have to tighten policy earlier than anticipated, pared those bets after the inflation data.
“There is considerable scope for productivity growth to pick up, keeping inflation low over the medium term,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “Against this low inflation backdrop, we believe the MPC is likely to tread cautiously and raise interest rates only very gradually over the coming years.”
The pound fell after the data and was trading at $1.6955 as of 10:02 a.m. London time, down 0.2 percent on the day.
Money-market investors see less of a chance of an increase in the BOE’s benchmark interest rate in January than before the inflation data, according to forward rates on the sterling overnight interbank average compiled by Tullett Prebon Plc.
Separately, the ONS said annual house-price inflation accelerated to 9.9 percent in April, the strongest since June 2010. They gained 2 percent on the month. In London, price growth was 18.7 percent, the most since a record increase in July 2007.
Carney has said interest rates are the “last line of defense” against risks to financial stability from the housing market and so-called macroprudential tools will be used first. The governor leads a meeting today of the BOE’s Financial Policy Committee, which may decide to take action to cool property. It will publish its report next week.
The inflation data showed that consumer prices fell 0.1 percent in May from April. Pressure came from supermarket price wars that drove down the cost of food and non-alcoholic beverages. They dropped 0.6 percent on the year, the first annual decline since 2006 and the largest since October 2004.
Clothing prices also fell, as did air and sea transport costs after travel operators raised fares in the run-up to Easter in April. Air fares declined 3.2 percent on the month and sea transport plunged 9.9 percent. The core inflation rate fell to 1.6 percent from 2 percent.
Retail-price inflation, a measure used as a basis for the inflation-linked bond market, slowed to 2.4 percent, the lowest since December 2009, from 2.5 percent.
In a separate report, the ONS said factory input costs fell 0.9 percent in May from April. They dropped 5 percent compared with the same month in 2013. Output prices at factories fell 0.1 percent on the month and rose 0.5 percent from a year earlier.
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