U.K. Inflation Unexpectedly Slows to 0.3%; Core Rate Drops

  • Consumer-price growth misses 0.5% pace forecast by economists
  • Air fares, clothing costs lowered inflation rate in April

U.K. inflation unexpectedly slowed in April, highlighting the struggle Bank of England policy makers face to revive price growth.

The rate fell to 0.3 percent from 0.5 percent in March, driven lower by the cost of air fares and clothes, the Office for National Statistics said in London on Tuesday. Inflation hasn’t been lower since last year and the April reading was less than the 0.5 percent forecast by economists in a Bloomberg survey.

Inflation has been below the BOE’s 2 percent target for more than two years, largely due to lower oil costs and a stronger pound. The central bank expects the drag from those factors to fade, though it doesn’t expect inflation to return to the goal until mid-2018.

The U.K.’s June referendum on whether to leave the European Union may also be weighing on spending, James Knightley, an economist at ING Bank NV said in an interview on Bloomberg Television with Francine Lacqua.

“The big surprise has been clothing,” he said in an interview on Bloomberg Television’s “The Pulse” with Francine Lacqua. “It does tie in with perhaps a slowdown down story on the high street. This Brexit uncertainty could lead to more of that on the high street as spending slows.”

Core Drop

The U.K.’s core inflation rate, which excludes items such as food and energy, also declined last month, to 1.2 percent from 1.5 percent. Economists had forecast a reading of 1.4 percent.

On the month, consumer prices rose 0.1 percent in April. Air fares plunged 14 percent last month after rising in March during the Easter holiday. According to another inflation measure, the RPI, prices rose an annual 1.3 percent last month, compared with the 1.5 percent forecast by economists.

With inflation so low and the economy growing only modestly, economists see the BOE keeping its key interest rate at a record low 0.5 percent until the second quarter of 2017. 

The central bank’s base scenario is for a modest acceleration in price growth from the second half of 2016, though Governor Mark Carney has warned that the outlook is clouded by Britain’s referendum on European Union membership. He said last week that the vote poses the biggest risk and that leaving the bloc would weaken sterling and, potentially, push up inflation.

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