U.K. Inflation Accelerates Less Than Economists Forecast

U.K. inflation accelerated less than economists forecast in June as airfares and food costs offset an increase in fuel prices.

Consumer prices rose 2.9 percent from a year earlier, compared with 2.7 percent in May, the Office for National Statistics said in London today. The median forecast of 31 economists in a Bloomberg News survey was 3 percent. The pound weakened against the dollar after the data.

The Bank of England, which targets a 2 percent inflation rate, forecasts that price gains will cool toward the goal as one-time factors drop out of calculations. Governor Mark Carney will next month present the Monetary Policy Committee’s review of policy guidance as a way to maintain stimulus in the economy and stoke a recovery.

“It seems likely that June’s inflation figure will represent this year’s peak,” said Samuel Tombs, an economist at Capital Economics Ltd. in London. “It’s likely to fall back to the 2 percent target by the end of the year. Accordingly, there’s nothing in the inflation outlook to dissuade the MPC from pressing ahead with more formal forward guidance.”

The pound fell 0.2 percent against the dollar and was at $1.5074 as of 10:45 a.m. London time. Gilts rose, pushing the 10-year yield down 4 basis points to 2.3 percent.

Letter Avoided

Today’s data mean Carney, who took over the BOE this month, will avoid having to write an open letter to Chancellor of the Exchequer George Osborne about what will be done to control price gains. The bank’s mandate requires such a letter when inflation deviates more than a percentage point from the goal.

The largest upward contribution to the annual inflation rate in June came from clothing and shoes and motor fuels, the statistics office said. The largest downward effect was from food, airfares and recreation and culture.

From the previous month, consumer prices declined 0.2 percent in June, with clothing prices down 1.9 percent.

London-based Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, said July 9 that general merchandise fell for an eighth quarter in the 13 weeks ended June 29 as retailers offered discounts to lure shoppers. M&S noted “challenging” conditions and said it was “cautious” about the outlook.

Core Inflation

Core inflation, which excludes food, alcohol, energy and tobacco, accelerated to 2.3 percent in June from 2.2 percent the previous month, matching the median forecast of economists, today’s report showed.

Retail-price inflation, used in wage talks and as a basis for the inflation-linked bond market, quickened to 3.3 percent from 3.1 percent. Excluding mortgage interest payments, inflation was also 3.3 percent, the highest in five months.

In a separate report, the statistics office said manufacturing input prices rose 0.2 percent in June from May and 4.2 percent from a year earlier. The annual increase, which was driven by crude oil, was the biggest since March 2012. Factory-gate prices increased 0.1 percent in June versus May and were up 2 percent on the year. Core output prices were unchanged on the month and rose 1 percent compared with June 2012.

After returning to growth in the first quarter, Britain’s economy has shown some signs of gaining strength. Ernst & Young’s Item Club yesterday raised its forecast for this year to 1.1 percent from 0.6 percent in April on expectations for a pickup in consumer spending.

In another report today, the ONS said annual U.K. house-price inflation was 2.9 percent in May, up from 2.6 percent in April. In London, prices were up 6.6 percent. The average national value was 239,000 pounds ($360,000), the highest since the series began in March 2002.

Carney signaled on July 4 that the central bank will keep the key interest rate at a record low for longer than investors had expected. Officials also held their bond-purchase program at 375 billion pounds. Minutes of the policy decision will be published tomorrow and will show whether Carney followed his predecessor, Mervyn King, in voting for more quantitative easing.

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